Will a just transition label help enable a fair net zero economy?
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A group of global asset managers and asset owners, alongside the UK’s development finance institution, have backed a new Just Transition Finance Challenge to drive the integration of ‘S’ in environmental, social and governance and scale finance for impact as the economy adjusts to net zero.
The Challenge was launched by the City of London Corporation, together with its partners the Impact Investing Institute and ‘big four’ firm KPMG at the Finance for Impact Summit in London on Monday, alongside an impact investing framework developed by KPMG, to mobilise public and private capital for investments in a just transition to a low carbon economy.
“Every financial decision we make has an impact. But right now, not every impact is positive – from a social or environmental perspective. Addressing this is what the Finance for Impact Initiative is all about,” said the lord mayor of the City of London, Vincent Keaveny.
The minister for tourism, sport, heritage and civil society, Nigel Huddleston, stressed how social and environmental impact are linked. “I spend a lot of time engaging with communities as well as with the social impact investing sector and these groups have massive potential to deliver meaningful environmental and social benefits,” he said.
The Department for Work and Pensions called for evidence on social factors from the pensions industry in spring 2021. Last week, pensions minister Guy Opperman responded saying he will lead a taskforce to identify metrics and support trustees with the integration of social factors in pension investment.
Initiative will create just transition label for investors
A common set of criteria for a just transition will be consulted on in the summer and published later this year to enable the creation of a new Just Transition label for asset owners and managers. The backers include Railpen, the Environment Agency Pension Fund and master trust Nest.
The Just Transition label is designed to recognise investment products that deliver on three elements of a just transition: climate and environmental action; socio-economic equity and distribution; and community voice.
Michael Marshall, who heads up sustainable ownership at Railpen, said understanding and managing the social impact of the transition across companies and their supply chains is key to securing members’ future. “As a founding participant of this initiative, we are thrilled to be part of the knowledge-building and criteria development process,” he added.
Diandra Soobiah, head of responsible investment at Nest, said the master trust is looking forward to helping the Impact Investing Institute produce a workable framework. “Investors should want to demonstrate that they’re financing a Just Transition, reassuring members and customers that the social dimension is an important part of aligning portfolios with net zero. We encourage more asset owners and managers to consider adopting the framework, not just for new products but existing funds too,” she said.
‘No conflict with fiduciary duty’ - Dame Elizabeth Corley
When it comes to social factors, some companies lead the way while others are in the ‘wait and see’ camp, noted Dame Elizabeth Corley, who chairs the Impact Investing Institute. Speaking at the Summit on Monday, she acknowledged that committing to a just transition was “not just a simple, ‘Let’s put this line in the annual report’” but requires huge steps by industry.
Humility was called for as finance is not the only factor in creating change, she added: “We are part of the solution, we have to work with others.”
While 18 supporters might not sound like a lot, she said it was about capital committed, rather than number of companies.
Asked if she is concerned there could be a conflict with fiduciary duty, Dame Elizabeth said that there was no conflict. “It can be politicised, but it’s not a conflict,” she argued, adding however that there was a realisation that “it’s hard work".
Where do you start on ‘S’?
Speaking at the same event, some companies shared their approaches to social responsibility and said the journey starts at home, with insurer Aviva being a living wage and living hours employer through to its contractors and suppliers and offering equal parental leave rights to new fathers and mothers.
Zelda Bentham, global head of sustainability at Aviva, said being an investor and manager then also means that the firm can use shareholder votes to engage with other companies on these issues.
The lack of standardised measures for the S in ESG is sometimes cited as a barrier, but Andy Howard, global head of sustainable investments at asset manager Schroders, said while data about social aspects was imperfect, this should not be an excuse for inaction. There is “enough data to be able to build a picture. It’s not perfect, we need to push for more robust, consistent, rigorous data from underlying assets, but it’s not the first and foremost challenge,” he argued.
Vindi Banga, a partner at US private equity house Clayton Dubilier & Rice, said the key was that others can understand how a company arrived at its statements or data. “It’s imperfect right now, but as long as it’s transparent and verifiable” investors can work with it, he said.
Chris Hayward, policy chair at the City of London Corporation, warned companies about “impact washing”. He said: “Like greenwashing, impact washing undermines the entire ESG system if people choose headlines over hard work and shortcuts over substance.”
The issue, he added, is compounded by the lack of a coherent response, citing a report which found that the number of ESG and impact standards has nearly doubled in the past five years. “Without consensus and a sharing of methods, institutions, individuals and investors will lack the trust to know where positive impact can and cannot be made.”
There is a very high chance of window dressing and greenwashing because the incentives to exaggerate are high, said Andy Agathangelou, founder of campaign group the Transparency Task Force.
"However, this could and should be managed by stringent data verification processes, where we return to where we were before the post-truth era," he said, citing Violation Tracker UK as one resource.
Transparency and accountability are key, he said, "with adverse consequences for malpractice at an individual level – I do mean there needs to be risk of personal jeopardy. Sunlight, as always, remains the best disinfectant."
Can a label help to scale capital committed to achieving a just net zero transition?