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Talking to clients about the ‘just transition’

By: Toby Finden-Crofts


What is a ‘just transition’? A question that appears to be on the lips of many a discretionary fund manager and adviser, according to our latest research *, which found that 43% of respondents had no knowledge at all of what the term meant.

The language in the responsible investment space – ESG, sustainable, ethical etc – has been used interchangeably and is up for further scrutiny as we wait for the Financial Conduct Authority to publish their much-anticipated review of responsible fund labels.
But what is disconcerting, is the number of fund selectors and buyers – almost half the space that are not familiar with the concept of a ‘just transition’ – something that is vital for a sustainable future.

“As the number of sustainable funds in the market continues to grow, so too does the number of phrases and terminology involved,” commented Jack Dominy, research manager at Research in Finance.

“Indeed, we have probably reached a point now where understanding has hit a ceiling, and the best way to remove that ceiling is through education. There are many institutes and groups that are well-placed to offer this education when it comes to concepts such as just transition, but there is an opportunity too for investment managers to assist understanding here,” he added.
Fund groups are already addressing this in portfolios, including those that have backed the Investing in a Just Transition initiative led by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE), and can really help investment managers here in terms of education.

Explaining the just transition

A just transition can be broken down simply – a transition to a net-zero economy and society, that encompasses all in a fair and inclusive way, such as protecting workers’ rights and livelihoods. It will ensure the benefits and opportunities – as well as the challenges – of the move to a greener economy are shared equally and widely.

The Institute of Human Rights and Business (IHRB) has explained this further highlighting that achieving global net-zero objectives will require “unprecedented economic, industrial, and technological transformation in all countries”, but added that we need to be mindful that the transition from carbon intensive to more sustainable economies will have significant impacts on workers and communities – some positive, and others negative.

“There are clear and foreseeable risks for people around the world, in particular those who are least able to adapt to environmental and economic changes,” the IHRB said.

For example, there are those at risk while extracting materials needed for renewable technologies, while many jobs may also be vulnerable because of the move away from fossil fuels.

A just transition means mitigating some of these negative effects, while also ensuring there are new opportunities as the shifts towards sustainability occur.

Governments hold the primary responsibility in making the just transition happen, but investors play a crucial role in making sure the social aspect is fully integrated into the assessment, stewardship and capital allocation decisions within portfolios.

Recently, addressing the just transition has been incorporated into the Climate Action 100+ Net-Zero Company Benchmark, and the LSE has created an investor framework to make sure portfolio holdings are thinking about a just transition.

This sets out expectations across seven areas: strategy, workers, supply chain, communities, consumers, policy and partnerships, and transparency and disclosure. Among these categories include recommendations for:

• having a company plan adopted at board level
• incorporating the just transition into remuneration, planning, risk management, scenario exercises and capital investment, as well as acquisitions and restructuring
• ensuring affordable access to key goods and services
• ensuring representation of workers at all levels in transition decisions
• lobbying the government
• Task Force on Climate-Related Disclosures reporting

There are also a number of international policy frameworks that can help investors navigate the just transition. These include the UN’s International Labour Organization and human rights standards, which also has a just transition framework; the OECD’s Guidelines for Multinational Enterprises, and the European Union’s Taxonomy.

This is likely to be a key topic explored at COP27 in November held in Egypt. As knowledge and understanding evolve around just transition and what it means for different economies and communities, hopefully the awareness and keenness to take action among the fund selectors in the industry will increase.

And in terms of knowledge, fund groups can help to propel this forward. RiF’s Dominy explained: “Content and materials on terminology and ideas that are less well understood need to be concise, jargon-free and provide context with clear examples or case studies – all things which come through strongly in our responsible investing research.”

*The UK Responsible Investing Study (UKRIS) quantitative research surveyed 215 retail intermediaries, providing a wealth of information in responsible investing. The latest findings are taken from Wave 3 of this annual study conducted by Research in Finance. The study included feedback from a mix of DFMs (110) and IAs (105), and fieldwork was conducted in December 2021 to January 2022.

Further reading:

From-the-Grand-to-the-Granular_translating-just-transition-ambitions-into-investor-action.pdf (lse.ac.uk)
Climate change and the just transition A guide for investor action: download (unpri.org)

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