Climate change is a financial, as well as a physical, risk. Investors have long been focused on the financial impact of rising temperatures and urged investee companies to manage these risks.
Australia is finally getting serious about climate change. But as the world increasingly experiences the impacts of climate change, the time frame to transition the global economy to net-zero is shrinking rapidly.
The challenge of decarbonising and limiting global warming to 1.5c is a significant one. Emissions must be slashed and clean energy replace ageing and polluting fossil fuel power generation.
The human face of transition
A crucial piece of the low-carbon future is not getting the attention it requires – the human face of the transition: the workforces and the local communities built around the fossil fuel industry.
The low-carbon transition is inextricably linked with profound social and economic change − communities and workers must not be forgotten as industries transform and diversify.
Governments, investors and businesses need to work together towards a just transition – a transition of the climate, economy and society to a net-zero future, one that is timely, fair and meets the goals of the Paris Agreement. It is not just a social good, it is a clear investment issue.
A transition that ignores the needs of fossil fuel-dependent workforces and communities risks significant economic losses and increased social support costs due to higher unemployment, concentrated regional dislocation and more. Companies which don’t adopt good practices risk their social license to operate and could also face commercial disadvantage.
Material financial risk
Clearly, the wellbeing of people and communities has a clear material link to the strength of the economy and financial outcomes and it is a material financial risk for investors. This is risk that institutional investors with broad investment across the whole economy, such as the superannuation funds which make up ACSI’s membership, cannot fully mitigate.
Companies with significant exposure to fossil fuels have a clear role to play. They need to engage widely with all stakeholders, including workers, and make plans specific to each location and context.
One size does not fit all. They must report on their transition plans so investors can be confident the company is managing the transition carefully and thoroughly. What percentage of their workers are being retrained, re-employed or made redundant? What consideration is being given to communities that depend on assets that will need to close? Are communities involved in planning their own low-carbon future? At present, reporting like this is very scarce in Australia, although more common in other markets.
Government policy needed
Companies cannot do it alone. Governments around the country need to put in place a range of policies to support a just transition.
A federal just transition framework would outline the overarching approach, define the roles and responsibilities of stakeholders and provide standards and guidance for high-emitting companies.
Local, properly-resourced Just Transition Agencies need to be established in areas affected by the closure of fossil fuel operations. These agencies should develop clear plans for their region, covering both direct worker support as well as broader economic development and diversification.
A coherent and comprehensive legal and policy environment must be established – companies need standards and guidance, and the just transition needs to be monitored.
As ever, funding is vital, but in addition to public money, policymakers must work with the private sector to facilitate the provision of private capital.
Because while there are significant risks in an unjust transition, the opportunities presented by a just transition are many. New, innovative and cleaner industries can take advantage of local competitive advantages, and, with reskilled local workforces can reach new markets.
Institutional investors, with their over-the-horizon investment time frames, are ready to play their part. Much needs to happen in a relatively short time.
Australia has a real opportunity to advance social change and establish a sustainable economy. This will also enhance the long-term sustainability of investment returns, which in turn will benefit the very workforces at the heart of the just transition.
As universal owners of capital, superannuation funds increasingly consider it part of their fiduciary duty to support a just transition. Workers, communities, governments, companies and investors must work together to tackle this challenge. A just transition will need us all.
The risks and opportunities of a just transition will be featured in ACSI’s Annual Conference, 3 May at the Sydney Hilton.
Louise Davidson is chief executive of ACSI.