The role of the financial sector in a just transition

17 November 2023

Effective finance is key in unlocking the climate and socio-economic goals of a just transition

By Nikki Griffiths

A successful global energy transition is not just about implementing more sustainable, less carbon-intensive energy sources, but about a positive socio-economic transformation as well. There is a global consensus that the two are directly linked and fundamental to achieving the climate objectives of the Paris Agreement.

The focus now is on a executing a just transition – achieving global energy transition while ensuring benefits and the costs of the transition are equally distributed. The International Labour Organisation defines a just transition as the greening of 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. It is particularly relevant in the context of developing countries which will need to contribute to the energy transition while tackling other development priorities like poverty and inequality.

The recent global stocktake of the Paris Agreement highlights that the achievement of “robust and equitable mitigation and adaption outcomes” requires just transitions tailored to specific contexts, and international cooperation is essential to support the domestic efforts of countries affected by the transition. The global stocktake is a process designed to assess the response to the climate crisis every five years, with the first-ever stocktake scheduled to conclude during this year's UN climate change conference (COP28).  South Africa’s Just Energy Transition Investment Plan (JET IP), which outlines the country’s investment priorities to achieve a low-carbon economy, also prioritises the achievement of a transition that is focused on both energy and positive socio-economic change.

With the urgency around achieving climate goals, there is increasing pressure to understand how the just part of the transition will be implemented especially in Africa. Policymakers are focusing on providing clarity on the priorities and the potential investments required to initiate and accelerate a just energy transition. The need to translate policy and the key themes into actionable plans that can be implemented and tracked is now critical. The effectiveness of the policies will ultimately be determined by the implementation and real-world financing of the just transition.

Financing the just transition

To achieve the vision of a more sustainable and equitable society, finance needs to be unlocked at scale. Economic diversification, development of the green economy, access to energy, new skills and social protection all require funding. The role of the financial sector in the successful implementation of the just transition is therefore critical, as its access ability to allocate capital to viable and impactful opportunities is central to the process.

Progress is being made in developing specific solutions aimed at financing the just transition. Earlier this year, the International Capital Markets Association (ICMA) included the principle of a just transition into its guidelines on Climate Transition Finance, which inform the global standards for instruments in the sustainable bond market, which represents the largest source of market finance dedicated to sustainability and climate transition. In addition, the South African Presidential Climate Commission (PCC), recognising the importance of the financial ecosystem in achieving the just transition, has recently recommended the design of a facility called the Just Transition Financing Mechanism with the ability to attract various pools of capital. It is an important step in catalysing the development and implementation of financing mechanisms and solutions to fund the change.

Not just about energy

Ultimately, the just transition is about people. To finance the transition, people and the potential impact of a financial solution need to be integrated into decision-making and the measures of success of a solution. This will require new skills and approaches by the financial sector when considering the opportunities and social risks of the energy transition. The skills, approaches and capabilities required include:

• Leadership to drive understanding and commitment to the importance of the energy and socio-economic transition that needs to take place to guarantee a sustainable future
• Remaining commercially-minded but impact-oriented when considering opportunities directly linked to the energy transition. Adopting a mindset that considers the financial and impact elements of the investment and/or transaction
• The willingness to be creative when developing financial solutions that can deliver a just transition. Innovating solutions that can unlock capital and structures that will fund the outcomes of the transition
• The ability to be contextually aware to develop solutions that are relevant and inclusive. Effective solutions will address and respond to the nuances of the context in which they take place
• The energy to adopt a partnership approach that promotes collaboration between different stakeholders. The transition will affect all sectors and it will demand collaboration between governments, banks, workers, investors, and grassroots organisations to find and implement solutions. It will require mechanisms that can unlock both commercial and concessional capital to achieve a common goal
• Finally, a willingness to embrace the complexity of social change. Social change does not fit neatly into a financial year, nor can every outcome of an investment be predicted but for change to happen there needs to be a willingness to navigate and accommodate the complexity of social change

Just transition considerations intersect directly with other inclusive growth objectives. The benefits of achieving a just transition is linked directly with the achievement of broader development goals, like the United Nations Sustainable Development Goals (SDGs) and national development agendas. The focus on a just transition provides a powerful opportunity for the financial sector to play a defining role in addressing the structural socio-economic inequalities of our time. 

 Griffiths is Transactor in RMB's Sustainable Finance and ESG Advisory team