Investors are pushing for the green-energy transition to be fair

While net-zero emissions goals grabbed the headlines at the United Nations global conference on climate change in Glasgow, Scotland, this month, interest from countries, investors and advocates to make sure that the green transition is just and fair also got a boost.

The concept has been around formally since 2015, when the Paris Agreement preamble recognized "the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities."

It gained traction at COP26, when more than 30 nations, including large coal producers, signed the Just Transition Declaration, committing to energy transition strategies ensuring that workers, particularly those in carbon-intensive industries, are not left behind in the transition to net-zero economies.

Just transition refers to ensuring that as economies shift to greener energy sources, the benefits are shared so that workers and communities do not lose out economically.

Asset owners and managers are also paying closer attention, for financial as well as humanitarian reasons. Some, such as the $495.3 billion California Public Employees' Retirement System, Sacramento, got an early start. Spurred by beliefs developed after the financial crisis, CalPERS' investment criteria following extensive research now include considering physical as well as financial capital, including workforce issues.

"As fiduciaries, we see human capital management as critical to risk-adjusted returns," said Anne Simpson, managing investment director for board governance and sustainability at CalPERS. "It's all about risk and return." CalPERS is now incorporating a just transition into its corporate sustainability assessments and engagement activities, and talking to asset managers as well.

Investors in clean energy can be harming workers if they don't pay attention to the human capital aspect. Unlike traditional energy-sector jobs with strong wages, benefits, and health and safety controls, those in the budding green energy industry typically start with less, which can impact workers and their communities, said Erin Hutson, director of corporate affairs for the Laborers' International Union of North America in Washington, with $45 billion in pension fund assets. Negative impacts on communities can also delay or derail regulatory approval for projects, and the fallout can lead to investment losses, Ms. Hutson said. "I think people do recognize it's a topic they need to talk about," she said.

The Rev. Kirsten Snow Spalding, senior program director of the Ceres Investor Network in Berkeley, Calif., put it bluntly: "If it is not a just transition, there will be no transition." By failing to engage local communities and workers, developers and investors in clean energy projects jeopardize the adoption and future uptake, Ms. Spalding said. The network's 200-plus institutional investor members manage more than $47 trillion in assets. The parent organization Ceres is a non-profit that works to advance sustainability in capital markets.

"It's about risk and opportunity. As investors make these huge commitments, if they don't talk about (just transition) they are ignoring the risk. We expect to see in corporate transition plans how workers are engaged and what the outcomes are going to be," said Ms. Spalding.

Asset owners and managers focused on just transition are engaging with companies they hold to see how their green energy transition plans address the issue of economic fairness for workers.

One example is Royal London Asset Management, with £148 billion ($198.4 billion) under management. In collaboration with the £30 million Friends Provident Foundation, York, England, RLAM has seen good responses from U.K. energy utility companies when it asks to see just transition strategies that address economic opportunities as well as decarbonization, according to RLAM.

"You see some big investors for the first time engaging companies on this. They are asking what the transition plan is. I don't think companies have been asked that," Ms. Hutson said. LIUNA is also engaging most infrastructure and private equity managers on the topic, and the response has been "generally positive," she said.

Soon, companies will also be judged by a benchmark being developed by the Climate Action 100+ investor initiative, representing more than 615 investors with a collective $60 trillion in assets. The investor-led initiative engages with the world's largest corporate greenhouse gas emitters to improve climate change governance and reduce emissions.

Climate Action 100+ members already use a new Net-Zero Company Benchmark to track companies' progress on Paris-aligned goals, and sometime next year will have a related process for rating them on their approach to a just transition. It will target the largest emitters to scrutinize their transition plans.

The just transition metric is being built on International Labour Organization guidelines, so it will apply globally, said Ms. Spalding of Ceres Investor Network. Many network signatories have started using it in engagements with money managers, and some also use responsible contractor policies as an indicator of how managers address just transition, she said.

"I think we will see some intensive work on dialogue around just transition. If we don't see progress, expect to see some (shareholder) resolutions," Ms. Spalding said.

Climate Action 100+ also collaborated on a related benchmark with the World Benchmarking Alliance and Council for Inclusive Capitalism. WBA members, including asset owners and managers, work with 2,000 leading companies to help them achieve sustainable development goals, while CIC is a group of business and religious leaders that represents $10.5 trillion in assets under management. CIC members commit their organizations to actions that create long-term value for all stakeholders.

The Council for Inclusive Capitalism's framework for company action on a just transition offers investors methodologies for assessing corporate just-transition plans, with a focus on examples and case studies.

The framework is important, CalPERS' Ms. Simpson said, "so we can start tying performance into financials. We are putting a foundation in place."

A human capital reporting framework expected next year from the U.S. Securities and Exchange Commission should also help investors assess how public companies are doing in the context of just energy transition.

Climate Action 100+ will be assessing companies on their commitment to ensure a just transition for workers as part of their decarbonization strategy. A just transition benchmark is still being developed, but some early results could be included in their 2022 Net-Zero Company Benchmark report in March, published in time for the next shareholder proxy season. "We want an approach that's going to work with the toughest emitters," said Ms. Simpson.

She cites an October report from the World Bank-affiliated Climate Investment Funds that options for institutional investors to invest in clean power projects through private equity, venture capital and fixed income are expanding. It also noted that large pension fund managers like the C$541.5 billion ($431.2 billion) Canada Pension Plan Investment Board, Toronto, are buying or creating green investment instruments in emerging markets.

Institutional investors, the CIF report said, "could make the biggest impact. Pension funds and similar institutions have long investment horizons, face ESG pressure from investors, and are increasingly eager to support the transition to a lower-carbon economy. Supported appropriately, they could redirect vast capital flows toward the energy transition."

By making just transition part of that expansion, said Ms. Simpson of CalPERS, "the impact we could have is potentially huge."