Why the net zero transition needs people at its heart

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Why the net zero transition needs people at its heart

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This content is contributed or sourced from third parties but has been subject to Finextra editorial review.

It is no secret that we need to act more urgently if we are to effectively tackle the most severe consequences of climate change. Global warming, and the dire effects that come with it, are already drastically impacting the world and its civilians. Whether it be increased natural disasters, the reduction of biodiversity, or less clean air for people to breathe, there is growing cause for concern and increased desperation to transition to net zero.

The transition to net zero, while offering long-term benefits for society such as biodiversity preservation, improved public health, and new business opportunities, could also lead to negative socio-economic effects if not handled correctly. Transitioning from high-emitting activities thus may result in ‘stranded’ communities and job losses. It may also negatively affect low-income consumers and local economies. Social inequalities can also be perpetuated or solidified, especially among vulnerable groups, who may not be able to adjust to the changes associated with the transition. As low-carbon energy sources expand, they may also create concerns related to human rights such as abuses of indigenous peoples’ rights, displacement, and loss of livelihoods.

That is why we need a ‘just transition’. The concept of a just transition integrates social and environmental concerns related to a net-zero transition. It stems from the fact that, although climate change is an environmental issue, it will unavoidably lead to changes that have social implications as well. Rather than choosing between social justice and the environment, we should strive to uphold both.

In 2015, the Paris Agreement called upon the Parties to consider “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs” when taking actions to address climate change. Since then, several countries (such as Canada, South Africa, EU, and UK) have also started developing initiatives related to a just transition. In 2021, the G7 affirmed the ministers’ commitment to address environmental justice and just transition objectives. Commitment to supporting a just transition has been further reinforced by the Glasgow Climate Pact and the Sharm el-Sheikh Implementation Plan.

Although the concept of just transition has been around for some time, its incorporation into climate action by financial institutions is a relatively recent but rapidly growing phenomenon. Some banks have started supporting a just transition by integrating social justice into their environmental, social and governance (ESG) reports, corporate social responsibility (CSR) policies, plans to support emerging markets, and assessment reports based on the principles for responsible banking (PRB).

Financial institutions are grappling with the realisation that a net-zero transition opens new opportunities and benefits, but at the same time might produce negative socio-economic implications as well. More and more, opinion is that a green future may not be possible if not supported by measures aiming to tackle the social injustice that it might bring. Thus, the question is not whether ‘just’ will become a necessary part of any net-zero transition path, but rather how it will be achieved.

How can it be achieved? That is something that myself, alongside other colleagues from Imperial College Business School’s Centre for Climate Finance and Investment have sought to explore in our latest briefing paper “What is a just transition and how does it affect the financial sector?”.

Defining a just transition is challenging, as there are numerous objectives to consider. It might range from broader goals, such as fairness and inclusivity to everyone, to more concrete goals, such as ensuring decent work and eradicating of poverty.

The concept of just transition is often associated with addressing injustices in the energy sector, particularly regarding the loss of brown jobs, which are roles that lead to pollution, loss of biodiversity, and depletion of natural resouces. However, the socio-economic impacts of a low-carbon transition usually extend beyond those felt by the fossil fuel sector workforce - they include a broader range of actors and concerns such as the impact on local communities, concerns related to land use for renewable energy projects, and the impact on consumers, households, and businesses affected, for instance, by rising energy prices.

Beyond climate justice, the term ‘just transition’ can also encompass environmental and energy justice. It might imply focusing on specific social groups (for example, workers and local communities), aspects of a net-zero transition (such asdistribution and participation), and objectives (for example,improving labour standards and community renewal).

As well as addressing injustices once they have occurred, the aim is also to prevent them from occurring in the first place.

Why should financial institutions engage to ensure a 'just' transition that benefits both people and the environment?

Addressing social injustices would not be achievable without the involvement of all actors who play a key role in facilitating a green future. Financial institutions are no exception in this regard.

They should aim to incorporate a just transition into their green plans to ensure compliance with growing national and international initiatives requiring a net-zero transition to be just. All financial institutions are expected to align their strategies with the Paris Agreement and the Sustainable Development Goals (SDGs), as well as other key plan such as the Glasgow Climate Pact and the Sharm El-Sheikh Implementation Plan, which call for a transition to minimise negative economic and social impacts and promote work equality, social protection and social solidarity measures, among others.

Secondly, the financial sector should support just transition efforts to reduce financial risks related to climate action. Failure to consider socio-economic challenges could lead to climate action failing or being delayed, and consequently the financial sector may be adversely affected in terms of growth. As noted by International Labour Organization (ILO), overlooking the risks of potential negative impacts on workers, businesses, or communities can result in operational and supply chains disruptions, shifts in market demands, and decline of local economies, which in turn can negatively affect the health of the financial sector.

Lastly, a just transition is important for financial institutions because it creates space for new business opportunities. Addressing social concerns is critical to building a resilient green economy – one that nurtures human capacities, skills, and community growth in a timely manner. Otherwise, the results of a low-carbon transition may not reach their full potential, as inadequate attention to the socioeconomic dimension can lead to missed opportunities for green growth.

Several frameworks for implementing a just transition designed for the financial sector have already been developed. They offer initial guidance, including key steps and principles that the finance sector should consider to address just transition concerns. Financial institutions are expected to make commitments related to a just transition and to integrate them into their net-zero plans. They are also expected to support projects with a positive social impact, conduct just transition due diligence, and encourage product development aimed at addressing social injustices, among other things.

Yet, although some financial actors and companies have begun to develop plans for a just transition, this remains far from the norm. Further work is required to identify and standardise all components of a just transition – that is, all socio-economic risks resulting from a net-zero transition, pathways to address those risks, and metrics for evaluating progress on a just transition. Additional work will be also required to further develop a compelling ‘business case’ for investments in social development in the context of a green future. This entails further exploration of business opportunities associated with a just transition.

It is vitally important that we ensure any net-zero transition has the impact on people at the heart of it, and that society is considered just as much as the environment too. For financial institutions it makes economical, societal, and environmental sense to invest in a ‘just transition’, and the time to do so is now.

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Comments: (2)

Richard Peers

Richard Peers Founder at ResponsibleRisk Ltd

Thanks Ivana, getting to this a bit late but very important, many thanks for the detail.

Richard Peers

Richard Peers Founder at ResponsibleRisk Ltd

Thanks Ivana, getting to this a bit late but very important, many thanks for the detail.

Contributed

This content is contributed or sourced from third parties but has been subject to Finextra editorial review.