New Lab Launches To Shift Finance Focus To Just Transition
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As it stands, the vast majority of financing decisions for climate action do not explicitly consider the social opportunities, risks or dialogue needed to ensure success. That’s what the Just Transition Finance Lab sets out to alter following its launch in London on February 20th.
Formed by the Grantham Research Institute on Climate Change and the Environment and the LSE, the Lab seeks to bring the just transition to life through research, advocacy, stakeholder engagement and designing and testing solutions to embed within organisations.
“Given the scale of the climate crisis and need for rapid action, we now need to move from promising early signals to the transformation of the nearly $500 trillion global financial system for the just transition.”, shared Nick Robins, executive director of the Just Transition Finance Lab.
The International Labour Organisation (ILO) unpacks the just transition as a scenario where social and economic opportunities of climate and environmental action can be maximised. Achieving this all whilst minimising and carefully managing challenges through effective social dialogue, stakeholder engagement and stewardship of the fundamental principles and rights at work.
Whilst social indicators may be somewhat integrated into existing approaches for financing climate action, the Lab will focus on innovation around critical leverage points to drive exponential change. Doing so will be key to unlocking social advancement to ensure a shift to a green economy encompasses better jobs, gender equality, community renewal and universal access to key commodities.
Following the agreement made by countries at COP28 to triple renewables and double energy efficiency, the immediate need for financing is clear. In its ‘Financing a just transition’ report, the Lab’s team write that, “There is a historic opportunity to make sure that the clean energy expansion produces decent work, with social dialogue, shared value for communities, and universal access to clean energy for the 2.3 billion consumers without access to clean cooking and the 760 million without clean electricity.”
The Lab has four main priorities. This includes designing and deploying financial instruments and strategies as well as establishing effective metrics to measure performance and impact on advancing a just transition. Not only this, but it will work to identify and achieve necessary policy reforms and stimulate breakthrough innovations with best-in-class case studies.
This work builds on the foundations of the Investing in a Just Transition Initiative borne in 2018 as well as the Banking on a Just Transition project and plays into wider conversations about the role of finance and asset allocation in facilitating and funding climate adaption and mitigation strategies.
Embedding a just transition into net zero strategies
The appetite for change is there, especially as net zero economies, like the U.K.’s continue to grow. Robins recounted that “We’ve experienced a real growth in strategic recognition from investors and banks that climate and nature progress simply won’t be achieved without a focus on people. This has gone furthest in the area of shareholder engagement, as seen from the ClimateAction 100+ initiative.”
The Lab has already worked with Scottish energy company SSE to develop a just transition strategy, which is embedded into its wider net zero roadmap. For a company with a capitalisation of £17.7 billion as of January 2024, this is no small feat and has even brought the conversation of just transition into its annual general meeting (AGM). With the support of the Lab, SSE became the first organisation globally to have a dedicated just transition strategy set out over five aspects such as green bonds, consumer fairness and supporting communities with a subset of 20 principles.
After working on this with businesses, a logical next step is to integrate just transition factors throughout financial decision-making, comments Robins. He assesses where the entry point could be, “The appetite for this is strongest in terms of net zero planning where banks, investors and corporates are starting to show they are managing the social risks and opportunities for workers, communities, suppliers and consumers, and crucially how they are involving them in the process of change.”
What are the obstacles standing in the way of financing a just transition?
What stands in the way of progress on financing the just transition? The Lab outlines a handful of systemic challenges and leverage points on how to address them.
Are some obstacles more prevalent than others? “We see a set of interlocking obstacles holding back progress on the just transition. Linking them together is the overarching need for a shift in mentality for social factors to become absolutely intrinsic to climate policymaking, corporate climate action as well as the financing that underpins both.”, noted Robins. He calls out the need for braver and bolder leaders who are willing to break with finance and business as usual to traverse this space.
Place-based context is a priority for the just transition
Place-based context and a localised approach is fundamental to a just transition as each geography has its own nuances, be that related to the level of economic growth derived from fossil fuel industries or the development of social labour laws enshrined in the workplace.
The focus for the Lab will initially be on two countries, the U.K. and India. For the U.K., efforts will centre around place based just transition investment plans. Whereas in India, the Lab will link with partners to develop sustainable finance innovations that support a just transition to achieve the country’s 2070 net zero target.
Social justice is at the heart of a just transition which the Lab recognises as a key pillar. Most often, creating the social conditions for workers in the Global South dispersed across supply chains to thrive, remain ignored or fall as a lower priority than other ‘sustainability’ indicators, especially environmental ones.
Robins believes that the real test of the just transition will be in the Global South. “It has less than 4% of global assets, yet the biggest investment needs for climate and nature and the most profound social challenges to be faced, along with the greatest social opportunities”, he noted.
Continuing, Robins outlined that finance should focus on the needs of vulnerable workers in supply chains and also tailor financial solutions for SMEs and communities. He added that “The Global North has a lot to learn from developing countries in how green transitions can be done with social uplift.”
How to mobilise global debt markets for a just transition?
Another opportunity to encourage the take up of the just transition is in the green, social, sustainable and sustainability linked bond and loan market amongst sovereign, multinational, multi-lateral development banks and corporate issuers. That’s why, the LSE teamed up with the Climate Bonds Initiative (CBI) in the Autumn of 2023 to identify and promote the role of bond issuance to drive a just and inclusive transition to net zero across the globe.
The partnership looks specifically at the needs and demands for bond instruments to support a just transition and developing the type of bond strategies that could be used to achieve greater impact. Together, they are exploring its application in different geographies such as the U.K., Central Europe, India, Indonesia and South Africa to promote issuance. At COP28, the LSE and CBI released a report on mobilising global debt markets for a just transition which estimated that there could be already $548 billion of bonds which are relevant for the energy transition.
Robins set out the ideas for the next phase of this partnership. “We want to bring key bond market actors together to understand the barriers and identify solutions. We are not predetermining the outcome – we’re interested in green bonds which could support workforce and community development, sustainable bonds which could channel investment to both the environmental and social pillars of the just transition, as well as sustainability-linked products where just transition becomes a KPI.”, he shared.
Just Energy Transition Partnerships facilitate initial financing to Global South
The mission of the Lab is complimented by developments in recent years, including the formation of Just Energy Transition Partnerships (JETPs) which emerged for the first time at COP26 in Glasgow in 2021.
In their infancy, JETPs are a financing cooperation to coordinate resources and technical assistance from the Global North to recipient countries most vulnerable to climate change. The aim is to do so in a way that helps to address social consequences of the transition with the support of training, alternative job creation and new economic opportunities.
As a mechanism they stand to support the mobilisation of the $100 billion attributed to the Global North’s climate bill and climate financing, a somewhat broken promise has yet to be realised in full, having been agreed in 2022 at COP27 in Sharm El-Sheik, Egypt.
The first of its kind came in 2021, when South Africa was promised $8.5 billion in financing by France, Germany, the U.K., the U.S. as well as the European Union. Since then, countries including India, Indonesia, Vietnam and Senegal have all been beneficiaries of JETPs. For example, at the G20 Leaders’ Summit in Bali in November 2022, Indonesia’s JETP deal was announced with $20 billion in finance to be allocated over 3 to 5 years. Such efforts stand to show that capital is being mobilised to finance the just transition but, not at the speed necessary.
Making the just transition a bipartisan issue
How can we vote, advocate for and advance a just transition? As of October 2022, the ILO notes that only 49 countries have committed to placing employment at the heart of ambitious climate action and to promoting a just transition, whilst 65 of the 170 countries that submitted updated NDCs included references to a just transition.
With 2024, being a historic super election year as 64 countries head to the polls, what are the best-in-class examples of policy reform and implementation that Robins and his team have come across? “The fairness of the transition is a major political issue in country after country”, he said, recounting that “We’re already witnessing policy responses in a range of jurisdictions including the labour and community provisions of the U.S. Inflation Reduction Act, Spain’s just transition programme for coal, the wider EU just transition mechanism for carbon intensive regions as well as the JETP in South Africa.”
Robins adheres that it is crucial for the just transition to become a bipartisan issue so that policymakers at any point on the political spectrum can work to understand the hopes and fears of their people in terms of climate action. “Then, it’s the role of finance to allocate the capital at scale to where it’s needed to reduce climate loss and damage and realise the huge human potential of climate action”, he finalised.
