A just transition and the role of financial services | Grace Robertson, EY

Grace Robertson
Consultant
EY - Sustainable Finance Team

The world is currently in a race to limit global warming to ‘well below 2°C above pre-industrial levels’, as set forth by the 2015 Paris Agreement. Achieving this goal and transitioning to a Net Zero economy will require rapid, systemic changes from all countries and industries across the globe.

The necessary speed and scale of this decarbonisation poses substantial social risks. Presently millions of people’s incomes and lifestyles are tied to polluting industries such as fossil fuel extraction, manufacturing, and transport. These are sectors that will need to be eradicated or overhauled to realise Net Zero, meaning huge changes for workers, their communities and those that rely on such businesses to survive.

This is where the Just Transition comes in – providing a framework for us to work towards a more environmentally sustainable economy while managing the social impacts to create a more equal society.

The Just Transition – what and why?

The Just Transition first emerged as a concept in the 1970s, when it was developed by labour movements led by American trade unions. It has since broadened and more recently gained traction in the context of climate change and Net Zero, exemplified by its inclusion in the Paris Agreement. According to the International Labour Organisation (ILO), a Just Transition means “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.”

The Just Transition overlays all aspects of the Net Zero movement with a human rights lens, centring the interests of those most vulnerable to its impacts. This includes workers in high-carbon industries, marginalised local communities, Indigenous Peoples, consumers and more. It challenges decision-makers to include these groups in shaping the low-carbon transition, amplifying their perspectives to ensure no one is ‘left behind’.

Importantly, this is not only the ‘right thing to do’ – rather, practical application of the Just Transition is fundamental to achieving Net Zero. The shift to a low-carbon economy has the potential to radically advance social inclusion and poverty eradication by being a net generator of green, well-paid jobs, and transforming our ability to manage natural resources sustainably for all. By including everyone concerned and focusing on equity, a Just Transition approach can help safeguard this vision and uplift public support for decarbonisation, particularly among those who fear they will lose out.

For example, a 2022 survey of over 1,000 UK North Sea oil and gas workers found that 93% support clear, accessible pathways out of high carbon jobs, such as paid time off to reskill and targeted retraining to fill emerging skills gaps. The Just Transition approach can therefore ultimately help avoid delays in achieving Net Zero globally, by supporting those most affected and fairly distributing the benefits of the transition to all.

Achieving a Just Transition in financial services

Countries, regions and businesses are beginning to recognise the foundational role of a Just Transition approach to Net Zero. Last year’s COP28 in the UAE saw numerous discussions around the concept, including a possible Just Transition Work Programme. Meanwhile countries are starting to implement practical policies to support those most impacted by decarbonisation, such as Scotland’s three-year Transition Training Fund to support oil and gas workers’ retraining costs.

While much of this action to date has focused on the real economy, activity on the Just Transition in financial services is also beginning to pick up. From a regulatory perspective, the new EU Corporate Sustainability Reporting Directive (CSRD) contains multiple disclosure requirements relating to the Just Transition, such as the requirement for companies to report on the impacts of the low-carbon transition on their own workforce, and how these impacts are being mitigated. Similarly, the voluntary frameworks from the UK’s Transition Plan Taskforce (TPT) and the Taskforce on Nature-related Financial Disclosures (TNFD) have both recognised broad stakeholder impacts, and the need for Just Transitions in climate and nature respectively.

The growing focus from financial services regulators is reflected in increasing ‘bottom up’ action from individual companies. For example, Lloyds Bank have partnered with edie to publish a Business Guide to the Just Transition, while Phoenix have specifically addressed the importance of a Just Transition and their progress towards it within their Net Zero Transition Plan. The Just Transition is also supported by industry bodies such as the Principles for Responsible Investment and the UNEP Finance Initiative.

Of course, many challenges remain to applying a Just Transition approach in financial services and beyond. These issues include how to measure outcomes, data availability and quality, and resource and expertise constraints. However, the amount of activity demonstrates a clear recognition of the importance of the Just Transition in linking a commitment to Net Zero with the need for an equitable and inclusive economy. There is still much work to do, but it certainly gives me hope that not only do we intend to reach Net Zero, but we intend to do it the right way.