Climate policy pushback focuses investors on the just transition

Investors increasingly want to know how corporate net zero policies will bring people along with them

As policies to cut carbon emissions begin to bite around the world, investors are intensifying efforts to ensure companies and policymakers are managing the social implications of the transition to net zero.

“We are starting to see the impact of failing to consider a just transition,” says Nancy Hardie, a sustainability analyst at UK-based fund manager Abrdn. “It’s great to have these climate goals, but if the [net zero transition] isn’t managed in a just way, there will be financial consequences.”

Across Europe, farmers have been protesting about the impact of environmental policies, forcing a partial climbdown from the European Commission over its Securing our Future climate package. US auto unions have forced carmakers to promise to unionise electric vehicle production, while steelworkers in South Wales face thousands of job losses as Tata Steel switches to cleaner arc furnaces as part of its commitment to net zero emissions.

“If companies are going to have a net zero commitment, a key element of a just transition is bringing along people – whether employees, communities or customers,” says Emilie Goodall, head of stewardship, Europe, at Fidelity International. “Failing to do so represents a risk to those ambitions.”

Failure to ensure a just transition can also have tangible financial and political impacts, say investors. They cite the cost to companies of poor worker relations, or the loss of their “social licence to operate”, making it harder to win approval for new plants, pipelines or clean energy projects. They also point to wider systemic challenges, such as political opposition to climate policy, exemplified by the farmer protests.

Investor interest in issues around the just transition also reflects more nuanced thinking about how to navigate the path to net zero, says Helen Mbugua-Kahuki, director of research at Calvert Research and Management in Washington, DC. Rather than simply divesting carbon-intensive companies and investing in green stocks, investors are “trying to figure out how to get to the green without too much impact from a social perspective”, she says.

Leaving no one behind

The just transition isn’t a new concept: it was coined by US trade unionists in the 1990s and is referenced in the 2015 Paris Agreement. Just transition is defined by the International Labour Organization as “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind”.

For the private sector, a just transition might involve retraining or compensating workers as carbon-intensive industries close or transition to new business models. For governments, it includes provision of social security and support for affected communities. It also includes ensuring that poorer parts of society do not disproportionately bear the costs of climate policies which, for example, increase the cost of fossil energy or mandate the phase-out of dirty appliances or vehicles.

For both companies and government, it requires meaningful consultation and shared decision-making with affected groups.

That risk that climate policy might disenfranchise parts of the population was crystallised in the “yellow vest” protests that broke out in France in 2018, triggered partly by increases in fuel taxes. Since then, populists around the world have attacked climate policies on the grounds of their social and economic impacts.

These impacts can be particularly acute in emerging markets, says Peter van der Werf, head of engagement at Robeco, a Netherlands-based investment manager. “In less developed economies, a larger share of the population is at risk from shifting away from current business models,” he says, given the larger economic footprint of carbon-intensive sectors in those countries, and their relatively weaker social safety nets.

Rising up the agenda

Concerns around social equity, threats to system-wide climate policy, and risks to individual companies have pushed the just transition up the investment agenda, says Nick Robins, professor in practice for sustainable finance at the London School of Economics. “We’ve moved from a sense of unease – that we need to make sure we don’t leave anyone behind – to the just transition being recognised and put into [risk management] frameworks,” he says. “But in terms of delivery, there is still a very long way to go.”

Robins cites work done by Climate Action 100+. The grouping, which brings together more than 700 investors to engage with 170 of the world’s largest corporate carbon emitters, tracked several just transition indicators for the first time last year. In research published last October, it found that only 10 per cent of 150 focus companies have set out just transition plans, and only five per cent had developed these in consultation with key stakeholders.

“Credible just transition plans are vital for mitigating the significant risks of an unmanaged transition to net zero,” the CA100+ said.

Many investors believe that UK-based energy utility SSE has such a plan. The company has closed down its coal-fired power plants and, in 2020, became the first company to publish a just transition strategy, guided by 20 principles.

“We have a whole-system view: we can see who is benefiting from the climate ‘goods’ – new skills, smart grids – as well as the climate ‘bads’ of lost livelihoods and potentially additional costs of goods and services,” says SSE chief sustainability officer Rachel McEwen. The company’s just transition plan helps it manage those negative consequences, while reducing the biggest risk to its business, says McEwen: that of regulatory pushback to new projects.

Company engagement

Increasingly, pressure is being brought to bear by investors, many of whom are adding just transition to the list of ESG topics they are raising with investee companies. Van der Werf says companies are generally proving receptive to Robeco’s engagement, although some find it difficult to delineate the extent of their social obligations. “Companies are struggling to define where the boundaries of their accountability and responsibility ends, and that of the government starts,” he says.

“Any effective transition requires collaboration between private, public and civil society,” says Goodall at Fidelity International. This might include cooperation on the impacts on communities of a dominant local employer shutting a plant or mine, or on the implications of decarbonisation on a country’s energy security and resilience.

This means that investors have to combine company engagement with policy advocacy to manage issues around the just transition, says Carlota Garcia-Manas, head of engagement and climate at Royal London Asset Management. “Advocacy is a big lever for investors to try to generate impact in this area,” she adds.

One outcome she points to is the inclusion of recommendations on addressing just transition issues in recent guidance from the Transition Plan Taskforce, which is making recommendations to the UK government about requirements for companies to produce and publish climate transition plans. 

Emerging guidance

Other guidance is emerging for companies and investors. The Impact Investing Institute last year published its Just Transition Criteria, which fund managers can use to design financial products that address just transition factors. The criteria are intended to help managers ensure that their funds not only deliver climate outcomes but also improve social equity and involve effective community engagement.

“If we’re going to be successful in achieving the net zero transition in a fair and equitable way, we’re going to need a lot more capital thinking in a fair and equitable way,” says Kieron Boyle, the III’s London-based chief executive. The institute has a goal of ensuring that half of the $2.2tn of climate-focused funds identified by Morningstar adopt just transition principles over the next five years.

“We have an extraordinary amount of incoming interest from investors around the just transition framework,” says Boyle. “They want to know how they should deal with the just transition, what it looks like for them, who they can learn from. There is something quite structural happening here.”