Kim Goodall, Impact Analyst at The Big Exchange explains why a “just transition” is important, and how The Big Exchange supports customers who care about both people and planet.
Kim Goodall, Impact Analyst at The Big Exchange (TBE) explains why a “just transition” is important, and how The Big Exchange supports customers who care about both people and planet.
A just transition simply means that we move from a high carbon economy dependent on fossil fuels (oil, gas and coal) to a low carbon economy in a way that is fair to both planet and people. A just transition intends that the impact on both planet and economies is managed. We must not leave anyone behind. It’s a moral issue as well as an environmental one.
Why is it a moral issue? Countries and regions, industries, communities and employees are dependent on fossil fuel activities so switching comes at a cost and it’s important that this cost is fair to everyone. Much of the transition impact falls on people least able to respond to it; some Asian and Emerging Markets for example where there is a high reliance on fossil fuels. People in those countries need help to move away from fossil. It’s more complex than simply switching on green energy; renewables supply must meet demand. Another key dependency is the infrastructure needed to both store and distribute renewables. To ensure the transition is “just”, social measures such as compensating those involved in fossil industries and training existing and future workers with the skills needed to participate in the green economy is important.
Excluding fossil fuel companies is one approach to tackling the need to transition away from fossil. Another approach which is less well understood is to prioritise transition to a low carbon world by “engaging to change” with companies which are heavy polluters. Fund managers “engage to change”, to reduce risk, whilst looking to maximise the opportunity to investors, and if done properly this strategy can be highly effective. Company engagement can identify barriers to transition so that they are addressed, and faster progress can be made.
If you simply sell out from a company, you lose your say; it’s hard to change the company. Regular engagement with set targets drives change. The objective is to get old energy companies to become new energy companies, to realign capital from bad to good. A good example often quoted is Orsted, a renowned global green energy company. It transitioned successfully from fossil fuels to renewables. If sustainability targets set are missed the fund manager can still sell its holding. The best way to find out about how fund managers are “engaging to change” companies is to look for their impact reports which are often available on their websites.
The UK regulator, the Financial Conduct Authority (FCA), has introduced 4 sustainability labels to increase transparency and help investors better navigate the market for impact, sustainable and ethical funds, and thus make informed and considered decisions that align with their investment preferences. Funds which use sustainability related terms (even if they do not adopt a label) must set out their sustainability objectives in a Consumer Facing Document.
Schroder Global Alternative Energy, which has adopted a Sustainability Focus label, invests in companies involved in the transition towards lower carbon sources of energy e.g., clean energy generation, distribution, storage, transport and associated materials, components and technologies. It excludes companies that generate revenue from fossil fuels and nuclear energy.
Another of the labels is ‘Sustainable Improver’, where the aim is to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of the firm. This label recognises that not everything is green but with the right, support and engagement, transition is possible.
Some fund managers choose to set a very low ceiling on possible fossil holdings which can be less than 5%. This can be a bit like food labelling; there is nothing in the ingredients but there is still caution about a remote chance that a trace of the allergen could be present. For the companies concerned this can be extrapolated to supply chains and, in the case of manufacturers, their product components and product use for example.
