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Why Transforming the Financial System is Vital for Driving a Just Transition

By Georgia Davies and Nick Robins

There is an urgent need to accelerate action on climate change. The year 2023 was the world’s hottest on record, and extreme weather events are causing significant loss and damage to the planet and those who live on it, costing the world approximately USD 16 million per hour in damage to infrastructure, property, agriculture, and human health.

Advancing the transition to clean energy, phasing out fossil fuels, and embracing regenerative agricultural practices are all pivotal steps towards building a net-zero economy. As this process deepens in country after country and sector after sector, it’s clear that the fairness of the transition has to be got right and people have to be at its heart. Just transition originated in the trade union movement as a strategy for ensuring that the interests of workers and communities would be central to sustainability transitions. Now it is recognised by governments as well as businesses, trade unions, civil society, and Indigenous Peoples as essential for effective action on climate and nature: we need to intentionally address the social dimension if we are to make progress. Eight years after just transition was included in the Paris Agreement, this momentum was embodied at COP 28 by governments adopting the first ever Just Transition Work Programme.

Currently, the vast majority of financing decisions for climate action do not explicitly consider the social opportunities, the risks, or the dialogue needed to ensure success.

Mobilising finance and investment is key to the just transition. In recent years, we’ve seen growing recognition and action across the financial system. Finance ministries are introducing programmes to provide fiscal resources and incentives for greening the economy, with worker and community benefits. Multilateral development banks are launching new programmes to support actions by governments and the private sector. Alongside this, institutional investors are incorporating just transition into their net-zero expectations of the companies they invest in, and some commercial banks are beginning to include just transition provisions in their net-zero plans.

But financing the just transition is still an emerging field. Currently, the vast majority of financing decisions for climate action do not explicitly consider the social opportunities, the risks, or the dialogue needed to ensure success. If this is not remedied, the world could miss out on the huge potential for social advancement, including more and better jobs, gender equality, and community renewal. A failure to achieve a just transition could also result in negative impacts for workers, communities, enterprises, and consumers, undermining trust and setting back progress on climate action.

Incremental changes to “finance as usual” practices will not be enough. A transformation of the nearly USD 500 trillion global financial system is needed to bring the just transition to life. This means moving beyond simply integrating social factors into existing approaches for financing climate action and towards a dynamic approach: one that seeks exponential change by focusing on deep innovation around critical leverage points.

The recently launched Just Transition Finance Lab aims to catalyse this transformation of the global financial system. Based within the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE), the Lab builds on five years of work with investors and banks, development finance institutions and policy-makers, trade unions, and civil society to translate the strategic imperative of the just transition into financial practice. Harnessing expertise within LSE and its global partners, the Lab will carry out research, engagement, and convening to design and test the financial solutions needed for a just transition.

Place-based context and a localised approach are fundamental to a just transition and central to the work of the [Just Transition Finance] Lab.

The Lab will primarily work across four key priority areas. The first is the integration of just transition principles into financial instruments (such as bonds) and financial strategies, notably transition plans. The second is the development of clear metrics to indicate “what good looks like” to be able to measure performance. Understanding the required reforms in regulation and policies to shape market rules and incentives is the third priority. Finally, the fourth priority is the development of a diverse set of case studies that profile emerging practice in bringing the just transition to life and examine the interplay between companies, finance institutions, workers, communities, and policy-makers. The first case study focuses on UK-based energy utility SSE, one of the first companies to design and implement a just transition strategy as part of its net-zero plan, in part as a result of shareholder engagement.

Place-based context and a localised approach are fundamental to a just transition and central to the work of the Lab. Initially, the focus will be on two countries: the UK and India. In the UK, efforts will centre around place-based just transition investment plans as well as work to put people at the centre of transition planning. In India, the Lab will build on existing links with partners to develop sustainable finance innovations that support a just transition in order to achieve the country’s 2070 net-zero target.

Overcoming the obstacles holding back the investment needed for the just transition will ultimately require a shift in mentality, so that social factors become intrinsic to climate policy-making, corporate climate action, and the financing that underpins both. If this is done then there is a strategic prize to seize bringing measurable improvements in social justice, faster action on climate and nature and the creation of new sources of value for people across the world.

To find out more about the Just Transition Finance Lab, visit: Read more from the LSE Business Review blog series, including an interview with Nick Robins: Climate action can’t leave people behind.

Nick Robins is Professor in Practice at LSE’s Grantham Research Institute and Executive Director of the Just Transition Finance Lab. Georgia Davies is Project Manager at the Just Transition Finance Lab.

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