Financing the Just Transition – does private capital hold the key?

Recent news that the world’s average temperature reached a new high on 3rd July, topping 17°C for the first time, has prompted ever-keener discussions on the need to combat climate change, and quickly. Global net zero targets have been in place since 2016, when the Paris Agreement was signed, yet, while countries across the globe have signalled their intention to reach net zero in the next few decades, the associated actions are worryingly scant.

What’s more, the process of getting to net zero is no easy ride and will have different impacts depending on country, sector and company. “Greening” the economy is a necessity, yet we cannot ignore the fallout for workers, communities and other parties who, to date, have relied on emissions-intensive economies.

This is where the Just Transition comes in. This seeks to ensure that the move towards a net zero economy happens in a fair way, leaving no-one behind.  It is about aiming to reduce inequalities that can be intensified by a transition and giving a voice to those most impacted.

So far, so good. But as we know, we’re not doing enough.

Public finances cannot, on their own, deliver a Just Transition; the Grantham Research Institute estimates that the UK alone needs £6 trillion in investment to achieve its net zero goals by 2050[1].

However, private capital could hold the answer.

Nay-sayers may question why private money should be funnelled into combatting climate change. Well, at its base level, not reaching net zero is recognised as a systemic risk. This means that, aside from “doing good”, advancing climate action is simply proper risk management. As a result, investment managers need to support a Just Transition if they are to deliver long-term value.

On top of this, we have witnessed a huge rise in investors seeking socially and environmentally responsible homes for their money and calling for greater detail on the impact of their investments. In fact, the most recent figures value the UK impact investing market at £7.9 billion, reflecting an almost ten-fold growth over the past ten years[2].

So, we have the appetite from both managers and investors, the final piece of the puzzle is bringing these two together and ensuring that money is truly being appropriately managed to fund the Just Transition.

Enter the Just Transition Finance Challenge[3].

Launched by the Impact Investing Institute (III), this finance challenge brings together global financial institutions with over £4 trillion of assets or assets under management which are committed to financing a Just Transition in the UK and emerging markets. With a range of guides and case studies to help financial institutions develop products that support a Just Transition across different asset classes and geographies, the III looks set to mobilise private capital to advance climate and environmental action, improve socio-economic distribution and equity, increase community voice and deliver financial returns.

It's still very early days – the Just Transition Finance Challenge was only launched last year – but with a range of asset managers pledging their support, alongside the UK’s development finance institution, British International Investment, perhaps private capital will provide the critical funding to help us reach our net zero ambitions and to support a Just Transition.

Who knows, maybe money really will make the world go round.

[1] Financing a Just Transition - Grantham Research Institute on climate change and the environment (lse.ac.uk)

[2] Market data | Big Society Capital

[3] Just transition finance | Impact Investing Institute