Our key takeaway: How are we going to get the $500 trillion of assets available across the globe to enhance the needed just transition? What would it take to make sustainability matter in financial decision-making? There are four obstacles to overcome, according to the recently launched LSE Just Transition Finance Lab. We need to overcome the limited traction of just transition in mainstream financing decisions. How? By designing and deploying financial instruments and strategies focused on just transition outcomes. We need to tackle the prevailing uncertainty over what ‘good’ looks like, and land on how we can track progress. How? By designing effective metrics to measure performance at all levels: system, institution, activity, place. We need to drive adequate policy rules and incentives to drive substantive action. How? By identifying, and then achieving, necessary policy reforms across the real economy and financial system. We need real-world leadership to raise the bar of expected practice. How? By stimulating breakthrough innovation and generating case studies to demonstrate just transition realities. And all of this in a way that ensures that affected stakeholders are at the table in this process of financial system transformation. The LSE Just Transition Finance Lab has its work cut out for it, but this is a shared imperative. The lab calls on all financial leaders to come together to explore these knotty challenges and the crucial role their industry can play.
The LSE Just Transition Finance Lab launched The Just Transition: Transforming the Financial System to Deliver Action (February 2024). The Just Transition Finance Lab has as its goal being a centre for experimentation and excellence in the financial solutions needed for a just transition:
- The planetary urgency of the just transition: The report delves into the imperative of just transition: “if net zero is the what, then the just transition is the how in terms of the social dimension of transformation.” The just transition acts as “the bridge between the often separate agendas around environmental sustainability and social justice”, with the need to focus on three touchpoints: (1) protect (implementing “the transition in ways that respect human rights in the fullest sense and protect people from harm”); (2) involve (“the involvement of people in the climate decisions that affect them”); and (3) create (“[t]he just transition is about how social innovation takes place to create new ways of providing energy, food, housing, transport, products, services and forms of value”). The report delves into the need for finance to be a “key lever in making the just transition a reality.” We are now moving from understanding the importance of financing a just transition, to system transformation - building on three core priorities for just transition finance: (1) anticipating, assessing and addressing the social risks of the transition; (2) identifying and enabling the social opportunities of the transition; and (3) ensuring meaningful dialogue in net zero planning. The Just Transition Finance Lab will in this respect “focus on financial instruments that embed just transition principles, identify ways of measuring outcomes, support policy reform and produce case studies of emerging practice” - with a specific focus on particular regions and sectors.
- Financing the just transition: The report reiterates the finding from the Financial Stability Board that “the global financial system holds nearly $500 trillion in assets across the globe, up from just under $300 trillion in 2013.” This represents the “combined assets of commercial banks and central banks, insurance firms and institutional investors, public financial institutions and municipal finance.” The report makes clear that the finance transformation need to involve three interlinked features: climate alignment, social justice and global inclusion. Just transition finance is already getting underway. For instance, when it comes to government policy, a growing number of countries are taking action: South Africa was the first country to make the just transition part of its Nationally Determined Contribution; Canada, Chile, the Philippines, Scotland and Spain are taking “substantive action”; the just transition is featuring as a key dimension of green industrial policies in some countries (like the U.S.); and the EU “has made the just transition a key pillar of its Green Deal programme.” When it comes to financial sector initiatives, investors, banks and public finance institutions are making commitments and taking steps (e.g., the 2023 benchmark of the Climate Action 100+ investor initiative). And when it comes to international financial collaboration, “[a]n example of leading practice in this area” is the four Just Energy Transition Partnerships (JETPs) that “have been negotiated between countries in the Global South – South Africa, Indonesia, Vietnam and Senegal – and international partners.”
- Breaking down the barriers: The report delves into four major obstacles to exponential growth in financing the just transition, and how these obstacles can be tackled (with a role for the Lab in leading to these leverage points). First, there is “[l[imited traction in mainstream financing decisions.” A response is looking to “[d]esign and deploy financial instruments and strategies focused on just transition outcomes.” Second, there is “[u]ncertainty over what ‘good’ looks like and how to track progress.” A response is looking to “[e]stablish effective metrics to measure performance at all levels: system, institution, activity, place.” Third, there are “[i]nadequate policy rules and incentives to drive substantive action.” A response is looking to “[i]dentify and achieve necessary policy reforms across the real economy and financial system.” Fourth, there is “[i]nsufficient real-world leadership to raise the bar of expected practice.” A response is looking to “[s]timulate breakthrough innovation and generate case studies to demonstrate just transition realities.” And the lab makes clear that “[c]utting across these four goals is a common priority: make sure that affected stakeholders are at the table in this process of financial system transformation.”
