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.
There’s a lot of talk about just transition in the run up to COP28, the international climate change meeting, but what does it mean? 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 moving away 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; Asia and the Emerging Markets for example where there is a high reliance on fossil fuels. People in those countries need help to move away from fossil. Its 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.
Can you give some examples of how this works in practice. There’s a filter on our website that allows customers to sort funds to only those that are “fossil free.”1 One such fund on our platform is the Schroder Global Energy Transition fund. The fund 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 and excludes companies that generate revenue from fossil fuels and nuclear energy. Another fund on the TBE platform also excluding fossil is the FP WHEB Global Sustainability Fund.
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 but to “engage to change” the? companies. 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), is proposing to introduce sustainability disclosure requirement and investment 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. It is intended to reduce potential harm arising from clients engaging firms that do not adequately manage climate-related risks and opportunities, and consumers buying unsuitable products.
One of the proposed 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 fund management this can be related to supply chain and in the case of manufacturers, their product components and product use for example.
How hopeful are you that progress will be made? The UN Climate Change website ran an article in July which said that “A strong outcome at COP28 Is Crucial for Climate Action and the Sustainable Development Goals (SDGs).” TBE’s process is rooted in aligning to the SDGs to achieve maximum impact. So, I’m hopeful.
1. Fossil free
The Big Exchange (TBE) uses a rigorous process, a range of information and proprietary research to determine whether a fund is fossil free.
Our first check screens using a third-party independent assessment (which all funds on the platform must have) to identify whether there are any fossil holdings. Secondly, all fund managers have to complete a questionnaire describing in detail their policy and providing a full list of their holdings (not just the top 10) on a range of controversies including fossil. Thirdly, our staff review the portfolio holdings before onboarding and at least annually. All information is correct as at the time of the last assessment.
Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
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