It is increasingly apparent that failing to support workers and communities on the losing side of the low-carbon transition will not only be unjust, it may derail the whole process. Decisions need to be made about where the money will come from to finance retraining for new jobs and provide social safety nets while the transition takes place

Political obstacle:
The people most likely to lose from the transition to a low-carbon economy are proving their political force and potential to block climate action

Funding change:
Significant finance is needed to pay for a “just transition” in all economic sectors, not just coal. Investors are starting to look into the issue

Key quote:
The question is where the money will come from to support a just transition. What are the options? Is it cash from taxpayers? Consumers on their energy bills? Business? Given the state of current government spending and the difficulty of adding money to energy bills, it is going to be business that are bringing forward significant amounts of investment.
The gilet jaune protests in France, the re-election of a climate-sceptic government in Australia and the strong support for Donald Trump across America’s coal states prove that the likely losers from the low-carbon transition represent a potent political force — and a formidable potential obstacle to tackling climate change. This realisation has triggered a growing discussion in policy and trade union circles about a “just transition” that seeks to protect the workers and communities threatened by decarbonisation, by providing retraining, new sources of employment and social safety nets. Debate about the role of the financial sector in understanding the associated risks, and investing in the solutions required, has, however, lagged behind. This is beginning to change. “The investor community is organising around this issue,” said Nick Robins, sustainable finance professor at the Grantham Research Institute at the London School of Economics, during an event at London Climate Week in early July 2019. The event, hosted by the Grantham Institute, think tank E3G and the SOAS University of London’s Centre for Sustainable Finance, saw the launch of the Banking on a Just Transition research project. “The finance sector will play a crucial role in any economic transition and has a strong incentive to get involved,” said Kate Levick, head of sustainable finance at E3G. Part of the challenge presented by the just transition is its sheer scale. While most attention has been focused on coal-producing regions in Europe and North America, the implications are much wider. James Diggle, head of energy and climate change at the UK’s Confederation of British Industry, said that it extends to the automotive sector, steel and chemicals. Robins cited preliminary work undertaken to understand the implications for the UK: one in five workers are expected to be impacted, with half this number seeing a drop in demand for their skills, and half an increase.

Geographical concentration
Furthermore, the impacts are often geographically concentrated, with regions that were hard-hit by deindustrialisation facing a similar blow from decarbonisation. “Some of those areas particularly exposed to declining demand for skill sets are in areas of multiple deprivation,” said Robins. “A big concern in areas such as Yorkshire is that the transition will be just like that of the 1980s away from coal, iron and steel. At the moment there is nothing to suggest it won’t be like that. People are right to be anxious. The policy frameworks are not in place.” In addition, the costs are likely to be large. Little research has been done on economy-wide costs but, to give an indication, a report published by Germany’s coal phase-out commission in January 2019 on ending coal use in the country by 2038 proposed €2 billion a year over 20 years to help coal-mining regions convert their industry away from mining. It also suggested a further €5 billion to support employees aged 58 and over and an additional €2 billion a year from 2023-2030 to compensate energy-intensive companies from resulting rises in power prices.

Public and private investment
The question, of course, is where will the money come from to support a just transition. “What are the options?” asked Diggle. “Is it cash from taxpayers? Consumers on their energy bills? Business? Given the state of current government spending and the difficulty of adding money to energy bills, it is going to be business that are bringing forward significant amounts of investment.” But the public sector will also have a role to play. In Europe, the European Union is stepping up. Speaking at the event was Aleksandra Tomzcak, policy coordinator at DG Environment at the European Commission, and coordinator of the European Commission Coal Regions in Transition Platform. She gave as examples the €100 million to finance flagship transition projects in Silesia and €230 million of EU funds for Czechia. “We have very good partnerships with the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank — they all want to be part of the initiative and they want to be financing projects,” she said. “But to make these sustainable, we would like to see more private sector investment.” This is where the Banking on a Just Transition project comes in. It is setting out to evaluate the rationale for banks to support a just transition, looking at the challenges and opportunities involved. It follows the launch last year of an initiative by the Principles for Responsible Investment (PRI), an investor grouping which brings together more than 2300 signatories, representing over $80 trillion in assets. In December 2018, the PRI launched an investor statement for its signatories to express their support for a just transition on climate change. By June 2019, 141 investors, representing $8 trillion in assets, had signed on. Robins gave five reasons why investors are looking into the issue: the systemic risk posed by an inability to manage the just transition; investors’ fiduciary responsibilities to their beneficiaries; the likelihood that the workforce relations involved in the just transition could have a material impact on investment value; the investment opportunities presented, especially for investors looking to demonstrate positive social impact; and finally the opportunity for investors to align their activities with broader societal goals. “Institutional investors are keen to understand the systemic risk” involved, said Bettina Reinboth, head of social issues at the PRI, and how risks around the just transition are linked to other social exposures, such as inequality. She admitted, however, that it is still early days. “Investors are still trying to understand how they can play a role,” she added.

Risk sharing
These risks are shared by the banking sector, said Ed Wells, head of global markets policy at HSBC bank. “We are a lending institution. It is easy to look at the transition from a macro perspective and talk about X thousand jobs in one sector being compensated by X thousand jobs in another sector, but that does not work at the local level. As a major lender to corporates around the world, a lot of those companies are exposed to the transition — so, therefore, is our lending and our shareholders’ money.” He added that regulators are showing an interest. “Transition risk is a systemic issue and the central bankers have said so. It does not matter what you believe, that is the reality — we will be stress-tested against those kinds of risk,” he said. One way of managing these risks is by supporting companies in moving away from carbon-intensive areas of business, said Wells. “It is important to think about engaging and working through the transition and not necessarily divesting and walking away.” He added: “Investing in high-carbon industries is where we would probably have the most impact … identifying where the key emitters are and getting them on to a sustainable pathway.” Wells gave the example of Denmark’s Ørsted, formerly DONG Energy, which has transitioned from oil, gas and coal to become an entirely renewables-focused energy business. Speaking after the event, Levick at E3G argues that if investors are taking a comprehensive view of the risks faced by portfolio companies, they should already be asking questions about how the companies they own are proposing to manage the impacts of the low-carbon transition on their workers and the communities in which they operate. “A really holistic approach would probably encompass some social transition funding [by companies], whether in supporting the communities in which they are based, or to ensure that their workers have the right skills they will need.”

Political agendas
Financing the just transition also presents direct opportunities. “It is possible to align investment decisions and instruments with social objectives, providing you can identify where the cash flows are … you can mobilise private money for social goods. That should be one of the objectives, to look at where we can find new instruments,” Wells added. These might be based on the social bond market — an offshoot of the green bond market, where bond proceeds are directed towards investments with a measurable social outcome. But there is likely to be a limit to private sector opportunities. “This is not a problem that can be easily solved by financial markets alone,” said E3G’s Levick. “To address the impacts of climate change, it is likely we will need the public sector to provide de-risking and risk transfer mechanisms, at various levels of government.” Robins agreed. “Sovereign bonds are a particularly good vehicle for financing the just transition, because public debt via sovereign bonds can finance things that markets underprovide, like R&D, revitalisation of communities and reskilling.” Discussions in policy circles around financing the just transition are only beginning in Europe, are still somewhat narrow and will, inevitability, be driven by political imperatives, says Levick. The just transition is mentioned in the UK government’s Green Finance Strategy, unveiled in July 2019, but more as “a statement of intent” rather than a subject of substantive policy at this point, she states. At the EU level, financing is emerging as a subject of discussion within its Platform for Coal Regions in Transition. “Fundamentally, this will be driven by political considerations … and will be fundamentally driven by the political constituencies seen as important enough for politicians to care about,” concludes Levick. “This risks distorting the issue and distracts from a wider public discussion about the transition in all sectors.”

Writer: Mark Nicholls