Impax blog

A just transition

29 Apr 2019 - by Ian Simm

I’m delighted to announce that Impax has signed the Statement of Investor Commitment to Support a Just Transition on Climate Change, now backed by over 130 institutions with $8trn in assets under management. This is an important initiative, highlighting a vital debate in which investors have a key role to play.

The transition to a more sustainable global economy is set to create enormous economic benefits. Yet, this shift is likely to be disruptive and these benefits will be unevenly spread. Without careful management over the long-term, there could be many more “stranded workers” and “stranded communities”, as well as “stranded assets”. However, as laid out in the Guide for Investor Action to the just transition, there is a key role for investors to work with other stakeholders to maximize the social benefits and minimize the downside risks of the transition for workers and communities.

In signing this statement, Impax is committing to contributing to this debate. At this early stage, we are particularly focused on three topics:

First, ensuring that investors frame their engagement in terms of their primary obligations/duties.
The entire reprogramming of our economy for sustainable development is an enormous task spanning many decades that will succeed only if multiple actors in society engage effectively. In this context, it is essential that investors consider the implications of ‘just transition’ analysis for their three core activities, namely, establishing investment beliefs, seeking and exploiting investment opportunities, and managing risk. For example, pension fund trustees could legitimately canvass beneficiaries for views on whether the fund should be proactively contributing to the preservation of the local environment or community ahead of their target retirement date.

Second, analyzing the “just transition” in context. Public policy analysis often utilizes a 3E framework, i.e. laws and regulations should be effective, efficient and equitable.
As market forces alone are unlikely to shape a sustainable economy in time to avoid catastrophic climate change, government intervention is inevitable, whether directed towards creating new markets, for example a distributed power system, funding training programmes or the development of new standards. Discussions of what interventions are “just” (or “equitable” in the 3E framework) also need to reflect the wider debate over whether the interventions are effective, i.e. that have a decent chance of fulfilling their objectives, and efficient, i.e. deliver value for money relative to alternatives. This framework is particularly relevant to the challenges of implementing the Paris Climate Agreement, a policy area in which the concept of a “just transition” is a key factor.

And third, developing a framework that is holistic and constructive.
If the focus of a “just transition” is restricted to those currently working in threatened industries (and the communities in which they live), we are likely to overlook key issues. It is important that we recognise the interests of those currently employed and those who may find work in new industries, for example, solar power generation and waste management. Similarly, the rights of current workers should be considered in the context of the employment opportunities available to future generations. These are challenging topics without easy answers.

In the context of their primary duties, investors can take a number of steps to contribute to the debate around a just transition, while also furthering their own interests. In particular, they can enhance their stewardship activity, raising these issues with the management teams of the companies in which they invest in order to encourage a thorough review of opportunities and risks. Similarly, acting individually or through representative organisations such as the Principles for Responsible Investment (PRI) and the Institutional Investor Group on Climate Change (IIGCC), they can encourage policy makers to commit to managing Just Transition issues – doing so effectively could dramatically improve the attractiveness of long-term investments, for example, into economic infrastructure or productive land.

These are highly complex issues that will challenge us for many years. Impax Asset Management is delighted to support the early stages of a global debate over the best way to tackle them. We look forward to discussing the issues raised by the Just Transition with our clients and investee companies.