What is meant by a Just Transition?
When we talk about sustainable development, or the journey to net zero, the focus is invariably on the future. We want to ensure that actions taken today don’t damage the environment for future generations. Thinking about a ‘Just Transition’ helps us to also focus on the present, and consider the impact today of steps we are taking to tackle climate change. It is important we reach net zero goals, but this needs to be done in ways that don’t disadvantage particular groups in society. The Just Transition reminds us that this process is not an abstract economic construct but impacts people and places — be they oil and gas workers in Aberdeen or the specific challenges facing communities across the global south. Much of the discussions around ‘ESG’ relate to the environment – the ‘E’ in this acronym. The Just Transition ensures that societal issues, the ’S’, are not overlooked.
How can pension providers support the Just Transition?
Pension schemes and asset owners have an important role to play but they can only move as fast as the underlying economy. For this to happen we need clear, long-term direction from global governments, to incentivise companies to decarbonise, and penalise those that fail to take the issue seriously.
While government can set the framework, action has to come from corporates, and the financial system that funds them. As big asset owners, pension schemes need to be active and responsible stewards, providing finance to help companies change business models and adapt to a lower carbon economy, while also allocating capital to companies that are helping deliver solutions, new ideas and new ways of doing business that support a Just Transition.
What role does divestment play?
A pension can simply sell out of fossil fuels, but while this might lower the scheme’s carbon footprint, ownership simply passes to someone else so it may not be effective in reducing real world emissions.
However, divestment has a role to play alongside stewardship. At Scottish Widows we now don’t invest in firms whose revenues are primarily from thermal coal and tar sands extraction. These activities need to stop if we are to tackle climate change.
Much of the focus to date around divestment and stewardship has been on equities. But there is also now focus on the role schemes play as fixed income investors, particularly with maturing corporate debt. Many companies will be looking for these financial arrangements to roll over, so there is a lever there for large investors to start a conversation about sustainability goals, and link this to future financing commitments.
What role does protecting nature play in the Just Transition?
This is a key part of the Just Transition, and something that pension schemes will need to look at in future, through the Taskforce on Nature-related Financial Disclosures (TNFD). There is a lot of talk about biodiversity, but this is effectively another word for ‘nature’ — a term we think is better understood by most pension members.
This encompasses a range of issues, from deforestation, land and marine pollution, desertification and habitat loss. Measuring this is more complex: there isn’t a single metric that shows a company’s, or pension scheme’s positive or negative impact on the natural world in the way that there is with carbon emissions. But taking a more proactive approach to nature does help when it comes to tackling climate change. Cross-industry groups and supra-national organisations can help pension schemes take a more holistic look at these challenges.
How important are 2030 net zero targets?
2050 can seem a long-way off so it is important to have shorter-term targets to monitor progress towards net zero goals. But pension schemes also must not lose sight of the longer-term view. There is often too much short-termism within the financial services industry, particularly in relation to investment returns. Rather than be caught up in quarterly performance figures we want to encourage managers to consider investments through this long-term lens and consider potential returns outlook over at least a 10- or 20-year period. On these timescales it is not hard to see that companies that are adapting to a low carbon economy are better placed to prosper, not only delivering returns for our members but helping build a world that they can retire into.
