Finance is one lever for a just transition. Image: Unsplash/Karsten Würth
- The importance of a just transition to a sustainable economy is part of the 2015 Paris Agreement, for which finance is a major lever.
- The financing agenda for the just transition is now moving into a new, more urgent phase with multi-lateral development banks, a five-country partnership and private sector pledging signalling a gaining of pace.
- Just transition and the centralization of positive people impacts as well as a shift to sustainability must be core to climate plans.
Meeting the goals of the Paris Agreement can’t happen unless decarbonization occurs across economies and industries. But while the need to reach net zero by 2050 is an accepted priority, the process of doing so will have different impacts depending on country, company or sector. Greening the economy can bring many benefits; however, the immediate fallout for workers, communities or other parties that have relied on emissions-intensive economies can’t be ignored either. That is why key actors must address their transitional, location-specific challenges head-on through a “just transition,” made clear in the 2015 treaty.
Finance is one key lever to deliver the just transition to a sustainable economy; the longstanding case for an investment-led shift of this kind has only deepened since the COVID-19 pandemic and Russian invasion of Ukraine. And there is also growing acceptance across the financial system for this transformation. The task now is to convert high-level recognition into the reallocation of public and private finance for sustainability reforms that deliver positive outcomes for people in terms of decent work, social inclusion and poverty eradication.
The heart of transition plans
From the beginning, financial policy and practice have been at the heart of the just transition. The ILO’s original Just Transition Guidelines from 2015 pointed to a range of public finance priorities for governments, from macro-economic strategy to industrial, regional and education policy.
Just transition principles must be integrated throughout every country’s climate plans. They also need to be adopted by finance ministries to deliver annual budgets and long-term financing plans that think through the “getting and the spending” dimensions of fiscal policy. For example, classic climate tools such as carbon pricing should be designed so that potentially regressive impacts on workers and consumers can be rerouted toward driving job creation and reducing inequality.
Equally, long-term public finance is needed to make the just transition a reality for workers, communities and consumers in key sectors and regions of the economy. As well as redirecting existing government spending to deliver both climate and social goals, the establishment of dedicated just transition funds can help focus attention (such as the European Union’s just transition fund). Governments can also issue sovereign bonds with proceeds directed to just transition priorities, responding to rising investor demand for green, social and sustainability bonds.
Alongside emerging public finance efforts, private financial institutions have also started recognizing their responsibility for supporting the just transition. Investors, in particular, have been increasingly incorporating just transition principles in their shareholder engagement priorities. Early results have been promising but a recent survey by the World Benchmarking Alliance concluded that “the vast majority of high-emitting companies are failing to demonstrate efforts towards a just transition,” pointing to the need for investors to raise their game.
The time is now
The financing agenda for the just transition is now moving into a new, more urgent phase. The COP26 climate summit in October 2021 underscored the centrality of the just transition to international climate progress and three steps stood out.
First, eight of the world’s leading multilateral development banks (MDBs) adopted a collective statement on how they will support the just transition in their financing and advice to governments and the private sector.
Second, a dedicated Just Energy Transition Partnership worth $8.5bn was announced between South Africa and five industrialized countries (European Union, France, Germany, the United Kingdom and the United States). Turning this statement of intent into practical steps in moving from a coal-based to a renewable energy economy will be crucial for South Africa and other emerging economies.
Third, the private sector Glasgow Finance Alliance for Net Zero (GFANZ) recognized that the just transition was a best practice component of the new transition plans that business and financial institutions will need to design and deliver.
In the face of converging economic, military and environmental crises, the just transition must move from slogan to substance in transactions across all of the $400 trillion worth of assets in the global financial system. The IPCC’s latest report underscored that “climate finance in support of a just transition is likely to be a key to a successful low-carbon transition globally.” That means overcoming the fundamental inequities in access to finance, particularly in developing and emerging economies.
Multi-party buy in
Annual net-zero investments have to grow three- to six-fold by 2030, according to the latest report from the IPCC. In developing countries, the need is even greater, with an investment expansion of four to eight times required, growing annual green investment from less than $500 billion a year to potentially over $3 trillion per year.
Closing this gap will take a system-wide approach based on social dialogue and stakeholder engagement. Just transition priorities must be included in the longstanding $100 billion climate finance pledge from industrialized to developing countries. The MDBs need to turn their just transition principles into scaled-up capital flows to help overcome market and policy barriers to inclusive climate action, notably in the Global South.
The world’s banks, insurers and investors have to make the just transition a core component of their net-zero plans, for example, by ensuring that core labour standards and human rights are applied. Importantly, financial regulators should ensure that reporting requirements for these net-zero plans include expectations for firms to be transparent about their just transition policies and performance.
For these actions to be significant, finance must raise its game. The voice of workers and communities will need to be heard throughout the design and delivery of just transition finance – “nothing about us without us,” as trade union leaders emphasize.
Furthermore, the just transition is not a nice-to-have add-on but central to bringing together the siloed environmental and social pillars of ESG (environmental, social, and governance) and demonstrating real impact. All in all, 2022 has to be the year when just transition finance reaches the level outlined at the 2021 Climate Change Conference in Glasgow, when “whatever it takes” was promised to address the magnitude of the climate emergency.
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The views expressed in this article are those of the author alone and not the World Economic Forum.