Just Transition 2.0: All else not being equal

Last year, the major oil and gas companies made excess profits of $134billion with executive pay increasing between 50-100%. At the same time we saw an unprecedented spike in an energy-fuelled cost of living crisis: the UNDP estimates soaring food and energy prices have put an additional 71 million people in developing countries into poverty. And in the poorer regions of the world where hundreds of millions of people still have no access to electricity or clean cookstoves or heating fuels, the global (SDG) goals are set to be missed by around 80%.??

The radiating impact of the war in Ukraine and the consequential inflation in energy prices is not distributed evenly, and neither will be the inevitable and locked-in consequences of climate change. Research from the NY Fed concluded that the ‘impact of both physical and transition risks may be uneven across location, income, race, and age’ and that the structure of support mechanisms may inadvertently ‘sustain and entrench existing inequalities’.?

Despite post-pandemic resolve to ‘build back better’, our global economic system continues to create ‘winners and losers’ with the financial system further amplifying those inequities: the world’s 10 richest men doubled their income during the pandemic, while many low and middle income households fell into deeper financial hardship. This acts as a further headwind against efforts to support those most in need, rendering it even more difficult to build resilience and accelerate the investment needed in climate action in the most vulnerable places.?

Before we can fully construct a plan for a #JustTransition (seeking to ensure that the substantial benefits of a green economy transition are shared widely, while also supporting those who stand to lose economically) we must also analyse the structural injustices and the distribution of impacts from an insufficient transition. Before looking at how we can manage the social risks of transition so that everyone benefits, all else being equal, we have to recognise that all else is not equal, and that inequality is being magnified on a daily basis by seemingly hard-wired economic and financial systems.?

There are two facts that exercise an interdependent effect on the financial system’s role in climate change and a just transition:

1. The evidence that Climate Change in and of itself has and will continue to exacerbate socio-economic inequality is overwhelming, with scientific consensus that there will be significantly more societal breakdown locked in once we breach specific ‘climate-safe’ temperature thresholds (like 1.5C). Last year the US EPA concluded that the effects of climate change disproportionately fall on "underserved communities who are least able to prepare for, and recover from, heat waves, poor air quality, flooding, and other impacts,"
2. The current financial system amplifies inequality by design. In most cases, banks create credit for those who have assets and not for those without. (The phenomenon is even seen within a bank itself.) At a larger scale, when a community has insufficient wealth or resilience it becomes less interesting to banks, who often move out of the area. Climate change will further exacerbate those inequalities with banks being forced to conclude that the most vulnerable to climate risk may no longer be ‘bankable’. While it is likely that 1 in 10 people will lose their home due to sea level rise, it is more than likely the banks would have left those regions some time before in hopes the public sector - taxpayers - will foot the bill.

The implications of this for anyone working in a bank right now: If nothing is done to transition the financial system towards equity and environmental resilience, the financial system will only continue to compound the destabilising impacts of climate change and social inequalities.?

Many of the current mechanisms for managing climate risk might cosmetically appear to help make us safer, but can often make things worse through their broader system impacts. Take insurance, for example, where investments used to cover liabilities for climate loss and damage can be invested in the very activities - like fossil fuels - which exacerbate the impacts of climate change, causing further loss and damage.?

Seen through the eyes of a system trying to tackle a global social and environmental challenge, this is completely illogical. But seen through the spreadsheet of financial optimisation, there are no errors flags.?

The way in which climate-related financial risk is being managed (and increasingly disclosed) creates a narrow framing of whether or not losses will be suffered directly by individual banks. It ignores whether investments may be ‘risk dumping’ (e.g. passing the risks on to others). For example, banks might be *managing* climate-related financial risk in the near term by virtue of having short term lending facilities (remember Stuart Kirk’s proclamation that if the average loan term is 6-years, who cares what happens in year-7?). ? In doing so, they neatly edit out their contributions to climate change, passing on the negative impacts to others and hence impoverishing the world elsewhere. Likewise, the strategies for adaptation need to be carefully differentiated between those which provide co-benefits (like managing heat stress in cities by installing green infrastructure that use nature to cool buildings, communities and increase social wellbeing whilst absorbing carbon) or ‘dumping the risks’ on others? (like increasing air conditioning systems which further contribute to heat islands, or building flood defences that push the water to poorer neighbourhoods, literally spilling sewage into the streets). In a narrow worldview, we think we can make ourselves safe by making others less safe. But ultimately, as depicted in this version of a cartoon from the 1930s, we are in the same boat together - it’s just that some will be impacted a long time before others.?

The beginnings of a shared understanding of what it means for banks and financial institutions to be “in it together” have been elevated by LSE’s Financing a Just Transition work and PRB’s Financial Health and Inclusion commitment, among others. Sitting at the intersection of Climate Action and Social Risks & Opportunities, these frameworks and measures offer insight into how we might manage the transition, taking into account some critical issues for society.

We absolutely need to ensure that climate action is designed in a way that takes those who would be most disrupted into account. Indeed many in the fossil fuel industry are calling for a just transition so that they can get good jobs in a green economy. This is vitally important and needs to be taken seriously in every transition plan and strategy. Banks can start by paying attention to the emerging data that looks at which banks are taking Just Transition seriously rather than those that use the narrative to delay transition and justify continuing business as usual. And there needs to be thorough due diligence of climate projects to assess the environmental and labour conditions through supply chains and the social impacts and human rights of affected communities.?

But we should also consider why the dominant starting point for the just transition narrative is who might ‘lose out’ from now onwards. In doing so there is a risk we forget the structural and historical injustices behind the inequality and uneven distribution of assets and resilience that is manifest in society right now. How does a transition with social justice at its core take into account those who have previously lost out and are disadvantaged from being able to capitalise on emerging opportunities, or are prevented from adequately maintaining their own safety and resilience? ?

We need to frame our debate on financial strategies to address these issues by recognising how the design of our financial system (and economic system more broadly) and the impact of climate change contribute to amplifying these inequalities further. There is a growing awareness among investors, civil society, businesses, financial regulators, policy makers, and academics that inequality poses an existential threat to the economy and society leading to the formation of a new Taskforce for Inequality-related Financial Disclosures. For climate strategies, we need to integrate these insights and analyse multiple intersections to consider a just transition without assuming all else being equal:??

Fortunately, several actors are already engaging in ‘business’ beyond the ‘usual,’ with innovations in “fair banking” & “climate justice” across communities and contexts. These include:? ???community banking models;? ??? climate innovators from around the world;? ??? cities taking action including setting up public banks;? ??? innovative financing structures and? ??? regional funds to support community resilience and adaptation; and ??guidance for how banks can participate in supporting communities. The common thread: an embedded understanding of the interdependent nature of the financial system together with community and environmental resilience. In other words, an understanding that we are all in it together.

The question here is how do we begin to rewire the system and take action in financial institutions to address inequality rather than amplifying its effects? How do we help build community wealth and resilience in the most vulnerable parts of the world and corners of each country? What are the most effective strategies, business incentives and tax structures? What are critical “non-technical” components to breach psychological and behavioural barriers? Where are the dead-ends and distractions??

Therefore, we are calling on our Network to help us answer the questions: How might we improve our understanding of the systemic forces at play at the intersection of finance and climate? What policy interventions and institutional initiatives and innovations can best contribute to a fairer and more rapid transition for all?? To answer these questions, we would love to hear your feedback: What in our narrative ??sparks an idea, ??exposes logical holes or disagreements, or reminds you of ?? case studies, ???practical tools, and ??resources for inspiration? To get involved please reach out to us on [email protected] .