This discussion paper is part of The Inevitable Policy Response (IPR), a groundbreaking initiative designed to ready financial markets for the risks posed by climate-related policies. The “Inevitable” aspect refers to the impending need for more substantial policy responses as the effects of climate change become increasingly evident.
The central questions revolve around the timing, nature, and geographic scope of these responses. IPR anticipates a forceful, abrupt, and potentially chaotic policy response by 2025 due to the delay in addressing climate change. It seeks to quantify the implications of this response on both the real economy and financial markets.
The concept of a just transition has become a crucial element of climate strategy, helping us understand where the impact of climate policies will be felt and what policies will be employed. It recognizes the need for an active social dimension in the rapid and extensive economic transformation required to address climate change. However, the just transition agenda is relatively new in climate policy and investor circles, and substantial effort is needed to ensure it’s seen as an essential, rather than an afterthought.
For investors, embracing the just transition makes good sense as it reduces systemic risk, enhances human capital, and strengthens their social legitimacy. The paper’s top findings are:
- Managing Change: A net-zero transition can reduce the human and economic costs of climate disruption and create new jobs and sustainable growth. But this requires addressing issues of fairness and equity in the transition.
- Essential Elements: Successful transitions require anticipating changes, empowering those affected, investing in human capital, focusing on spatial and place-based aspects, and mobilizing capital.
- Challenge Characteristics: Key sectors and regions will face significant employment implications, raising profound transition issues. Other technological shifts, like automation, may interact with the net-zero transition, potentially worsening sector/regional impacts.
- Policy Necessity: Thoughtfully designed government and corporate policies can ensure a just transition, leading to significant economic and social benefits. Public finance will play a crucial role in investing in human capital and inclusive growth.
- Institutional Investor Role: Responsible investors play a vital role in supporting a just transition, aligning with their commitment to incorporate environmental, social, and governance factors into their operations.
Without a robust social dimension, the Inevitable Policy Response (IPR) may be less effective or stall. The just transition is integral to the IPR’s eight policy levers and describes what the social dimension should entail.
The IPR forecast highlights the scale of the impending economic shift driven by policy, technology, and market changes. If the social aspects of change are managed effectively, this shift could usher in an era of inclusive growth and development. This is the essence of the just transition and is central to investors’ task of delivering resilient returns in an era of disruption.
Download the report: Why a just transition is crucial for effective climate action
Authors: Nick Robins is Professor in Practice for Sustainable Finance at the LSE Grantham Research Institute; James Rydge is a Policy Fellow at Grantham. They have been commissioned in their personal capacity to provide this paper for the Inevitable Policy Response project.
Source: UNPRI
