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September 13, 2022updated 15 Sep 2022 6:36am

Just transition: Why investors need to collaborate on standards

A growing number of financial institutions are working to address the lack of a common investing framework for achieving a just transition, raising concerns over fragmentation of such initiatives.

By Vibeka Mair

Sarah Gordon, CEO of the Impact Investing Institute, which launched a just transition initiative in July. (Photo courtesy of Impact Investing Institute)
  • Investors focus on the need to achieve a just transition has further ramped up since the Just Transition Declaration at Cop26.
  • Various investor initiatives are seeking to develop standards for assessing performance in respect of a just transition, with one launching in July.
  • Investors ultimately want to see agreement on one set of principles, but some feel collaboration between market participants could be better.

Achieving a ‘just transition’ is now widely cited across finance, business and politics as a necessity in respect of the global push for a lower-carbon economy. Broadly, this is the concept that everyone must benefit – or at least no one should lose out economically – from the shift to net-zero emissions.

Work is progressing on developing standards and approaches to help realise this goal. Yet such efforts – rather like the varying definitions of just transition – are in the early stages and fragmented. This reflects the case in areas from sustainability and taxonomy reporting to impact measurement and securities lending. For instance, many influential institutions and organisations – such as the European Commission, International Labour Organisation and European Bank for Reconstruction and Development – have their own definitions.

The concept of a just transition is not a new one; it had been discussed for decades by labour and environmental movements. But it was elevated to the international stage by its inclusion in the preamble of the 2015 Paris Agreement on Climate Change. It gained further prominence at the Cop26 climate summit in November last year, when 30 countries signed the Just Transition Declaration.

Recent developments have fuelled an even sharper focus on this goal. The current Europe-wide energy crisis is a clear example of the need for investors to help foster a just transition, given that soaring electricity and gas bills are causing “net-zero blowback”, says Colin Baines, investment engagement manager at Friends Provident Foundation (FPF), a UK non-profit focused on addressing equality and social justice issues. There is much talk on social media of the “net zero cult” or “net zero scam” and arguments that renewable energy is unreliable and thus to blame for spiking electricity and gas prices.

Proliferating projects

Against this backdrop there is a growing number of initiatives aiming to develop principles for just transition-focused investment but there are also signs that they are keen to collaborate. This reflects the fact that calls for an agreed approach for measuring impact have been growing louder in recent years.

In July, the UK-based Impact Investing Institute launched the Just Transition Finance Challenge (JTFC), with backing from 18 financial institutions, including asset owners and managers (see table below). The JTFC aims to develop criteria and a label for just transition investing products and to mobilise funds at scale to support a just transition in the UK and globally.

This came after France’s Finance for Tomorrow, a coalition of private and public players seeking to mobilise sustainable finance, last year launched Investors for a Just Transition (IJT). Also in 2021, investor networks such as US-based Ceres and the UN Principles for Responsible Investment, alongside a raft of Canadian investors, established Climate Engagement Canada to promote a just transition to net zero.

Meanwhile, Friends Provident Foundation (FPF) has been working with Royal London Asset Management on a programme of investor engagement with big British energy utilities to develop just transition strategies for some two years. FPF is thereby building on the Financing a Just Transition programme that it funded and which was launched in February 2018 by the LSE Grantham Institute, which also has a relationship with the JTFC. This led to the November 2020 establishment of the Financing a Just Transition Alliance (FJTA) by some 40 financial institutions, in conjunction with universities and trade unions.

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What’s more, organisations such as investor coalition Climate Action 100+ and the World Benchmarking Alliance are separately developing just transition metrics.

Collaboration hopes

Ultimately just transition-focused initiatives need to work together and are likely to consolidate at some point, says Vincent Puente, head of specialist investment credit at French asset manager Amundi (which offers a just transition-focused fund) and a member of the IJT initiative. The latter has had calls with FJTA but the two don’t have a formal relationship.

“I’m pretty sure that best practices of one initiative will be shared across the rest of the initiatives and there’s going to be a kind of cross-fertilisation,” Puente adds. He sees this leading to a common framework.

The JTFC appears to be targeting a similarly collaborative approach. It launched with a small group of founding participants “to test and develop the criteria”, says Sarah Gordon, chief executive of the Impact Investing Institute.

“Later this year, the draft criteria will be open to public consultation,” she tells Capital Monitor. “We also intend to re-open the [JTFC] to more participants as soon as our secretariat capacity, as a small not-for-profit organisation, allows, and would welcome any and all expressions of interest."

At the JTFC launch on 18 July, Elizabeth Corley, chair of the Impact Investment Institute, said: “We thought we’d only get four or five organisations signing up… To have 18 organisations signing up to this, we are really thrilled.”

These organisations will jointly develop the criteria by which they will be judged and “will get a label if they earn it”, she added. The goal is to have the criteria developed and consulted on by Cop27, Corley said, “and available if not in final, [then] in pre-final from”.

Data challenges, as ever

Similarly, the IJT is aiming for its members to ensure all companies agree on a common framework for data disclosure and best practice to measure the performance of companies in respect of the just transition.

Finding data for the environmental side is fairly straightforward, but it is much more complicated on the social side, says Puente. “There’s no framework, there’s no standard data. There’s nothing to basically build a portfolio around in a way that is easily understandable for investors.”  

He says the initiative has developed a scoring methodology for companies on the just transition based on four pillars: workers, territories, clients and society. The criteria for ‘society’ for example is how active companies are in participating in public policies, for ‘workers’ it is elements such as training and education and re-skilling.

The strategy also involves engagement with companies by members on the just transition that they feel is central to the energy transition in the sectors of energy, building and construction, transport and agriculture and the food industry.

IJT is already working with rating agency provider Moody’s and is in talks with Sustainalytics with a view to having the data provider support its work on engagement with corporates.

Concerns over fragmentation

All this being said, some suggest there could be better collaboration between industry participants.

David Osfield, global equity fund manager at EdenTree Investment Management, says his firm was not approached to be part of the JTFC and only found out about it after it announced its launch and supporting institutions. The £3.7bn fund house is part of the FJTA and integrates that framework across its screening and engagements on climate change. It also runs a fund focused on the just transition and circular economy.  

“We’re working with organisations like FTJA and [Dutch organisation] World Benchmarking Alliance,” Osfield says. “There’s obviously a lot going on, but I didn’t quite follow the purpose of making [the JTFC] a closed shop. I don’t think that necessarily leads to the best outcomes.”

The JTFC will welcome input from all firms at the upcoming consultation stage, stresses Gordon.

It will no doubt take time for investors to coalesce around a standard for assessing just transition performance, but the process has at least begun.

Capital Monitor is hosting the second part of its Making Sense of Net Zero webinar series alongside the New Statesman and Tech Monitor on September 21. Find out more information on NSMG.live.

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