New Lab calls for a transformation of the financial system to achieve just transition

A transformation of the $500 trillion global financial system is needed to deliver a just transition away from fossil fuels and into clean energy, according to a new report launched today by the Just Transition Finance Lab at the London School of Economics and Political Science.

The new Lab is being launched at a time of rising concern in many countries about the fairness of climate action. The just transition is designed as the strategy to make the shift to a net zero and resilient economy inclusive for workers, communities and other key stakeholders. Financial institutions are starting to take action to support the just transition, but this remains insufficient, according to the report.

For Professor Nick Robins, lead author of the report, “The vast majority of financing decisions for climate action do not explicitly consider the social opportunities, social risks or social dialogue needed to ensure success. If this is not remedied, the world could miss out on the huge potential for social advancement in terms of more and better jobs, gender equality, community renewal and universal access to key goods and services (such as energy). A failure to achieve the just transition could also result in negative consequences for some workers, communities, enterprises and consumers, undermining trust and setting back progress on climate action.”

‘The Just Transition: Transforming the Financial System to Deliver Action’ sets out why it is time to move from conceptual acceptance of a just transition to system transformation. It argues that the “financial world needs to price in just transition requirements and allocate capital to achieve this across the nearly US$500 trillion in assets in the global financial system.”

The report marks the launch of the LSE’s Just Transition Finance Lab, which has been established by the Grantham Research Institute on Climate Change and the Environment at LSE to support this shift. The Lab’s goal is to become a centre for experimentation and excellence in the financial solutions needed for a just transition. It will focus on designing financial instruments and strategies that bring the just transition to life and will also develop metrics to show “what good looks like”.

With the agreement by countries at COP28 to triple renewables and double energy efficiency, the report shows that “there is a historic opportunity to make sure that the clean energy expansion produces decent work, with social dialogue, shared value for communities, and universal access to clean energy for the 2.3 billion consumers without access to clean cooking and the 760 million without clean electricity.”

But the report warns that “these gains will not happen automatically and need determined government policy to enforce labour standards and human rights throughout the energy system as well as invest in the skills for the net zero energy workforce and resource the community empowerment that will be needed.”

The report makes clear that “both public and private finance will need a range of new financial tools and instruments to facilitate the just transition.” Within the financial system, the “assets held by private institutions such as commercial banks, institutional investors, insurance firms and capital market intermediaries (including stock exchanges, credit rating agencies, investment consultants and data providers) make up the bulk of the capital base that has to swing behind the just transition to net zero.” For this to happen, the report explains how policy reform can create the right economic and financial frameworks for the just transition.

The report indicates that a “just transition needs to be embedded into the investment decisions of all asset classes. A good place to start is the green, social, sustainable and sustainability-linked (GSS+) bond markets, where total issuance now stands at over $3.7 trillion.”

It states that “there is a growing market interest in the potential for these bonds to support a just transition, and integrating just transition into bond issuance can maximise the social co-benefits of green investments, ensure the transition does not exacerbate existing inequalities, and enable greater climate ambition.”

According to Nick Robins, the strategic prize for just transition finance is to bring “measurable improvements in social justice, faster action on climate and nature and the creation of new sources of value.”


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