The concept of “just transition” in environmental, social and governance (ESG) investing has been around for a while, but it seems many Asian investors are still unfamiliar with it.
Fortunately, the sustainability team at Fidelity International does a pretty decent job of explaining what just transition is in layman’s terms after finding out in a survey that only 42% of respondents are aware of what it means, with awareness lower among Asian investors (30%) compared with European investors (47%).
Of course, coupled with the lack of familiarity, investors also revealed a lack of conviction that just transition can be achieved, with 43% thinking its achievement is unlikely, 27% believing it will take more than 15 years, and 52% believing that it is an ongoing process.
These responses are way off what is needed to meet the Paris climate goals of limiting global warming to a 1.5 degrees Celsius increase by 2030 and reaching net zero by 2050, to say the least.
Anyway, the takeaways from Fidelity’s presentation of their findings provide some light that can help narrow the gap between the current reality and the Paris Club expectations.
The first takeaway is that investors should learn and understand as soon as possible what just transition means, since this will allow them to determine their investment strategies, asset allocation and risk profile.
The second takeaway – while just transition provides massive investment opportunities, investors are also a strong force that can push industries, companies and other stakeholders to a sense of urgency in terms of setting and achieving their just transition goals and targets. This is where shareholder engagement comes in.
The third – and perhaps the most important – is that just transition must happen in a way that doesn’t leave any sector behind, which means that the benefits of the transition must be enjoyed by all. This is where the social element of just transition comes in.
In this article, I will try and explain in a five- to 10-minute read what took Fidelity’s team of experts – Jenn-Hui Tan, chief sustainability officer; Flora Wang, head of stewardship, Asia; and Emilie Goodall, head of stewardship, Europe – almost an hour to explain. I cannot promise to capture all the nuances and technicalities they presented, but I hope to present a fairly accurate capsule, so bear with me.
Just transition
On the first takeaway, Fidelity defines just transition as “the move from a high- to a low-carbon economy in a manner that is fair to everyone”. This seems to be a generic definition. However, Fidelity breaks down “everyone” into four components – countries and regions, communities, industries, and employees – which is helpful to someone who seriously wants to understand what just transition really means.
At the country level, Fidelity says it must be recognized that some countries are more advance than others in terms of economic development; and hence, different countries are addressing decarbonization from different socio-economic contexts.
(At the risk of being too simplistic, it must be kept in mind that for most countries decarbonization heavily involves the energy sector. In other words, getting the energy sector to meet its decarbonization targets on time will go a long way towards achieving the Paris Club net-zero targets.)
In practice, this means that for each country, there must be regulations, standards and mechanisms that will pave the way for the energy sector, in particular, to transition to net zero in a manner that is fair to the industries, communities and employees.
At present, there is still a lot of work to be done; but in terms of regulations and standards, each country in Asia, in its own way and at their own pace, has been putting in place ESG or sustainability reporting and disclosure requirements to facilitate just transition.
Examples of this are seen in places like Hong Kong, Singapore, Korea, Japan, or even regionally as is the case with the Association of Southeast Asian Nations, where progress is being made, although not as fast as many people in the sustainability sector would like.
For the local industries and corporates, the regulations and standards set at country level will set the direction each will take in terms of setting their own net-zero targets. In addition, government and non-government support will be crucial in terms of helping each industry and corporate to meet their respective targets.
In the case of Indonesia, for example, the government has said it can reach net-zero emissions by 2055, five years ahead of the original target of 2060, if it receives financial and technology support.
Of course, achieving the net-zero targets for a particular industry or corporate will involve massive restructuring in its business strategies, operations, infrastructure, etc. And this restructuring is where an industry or corporate’s location will have varying impact on employees and communities.
In the case of an oil palm plantation in Indonesia, for example, achieving the plantation’s net-zero targets necessarily involves getting small farmers to switch agricultural methods to prevent deforestation, something to which they may be resistant.
Fidelity, however, makes it clear that the lack of a clear government policy in many cases is seen as the main barrier for achieving a just transition.
Investment opportunities
In this aspect, just transition is going to require a considerable amount of understanding of the starting points of companies, businesses and industries. This means applying these points thoughtfully in the investor’s engagement strategy, usually in combination with the voting rights of equity holders.
In the case of private assets, for example, this will involve direct investment in energy infrastructure systems and other key assets that will enable a coal-fired power plant to transition to renewable energy.
In the long term, all investors surveyed overwhelmingly believe investing in a just transition will have a positive (91%) impact on risk-return profiles, according to the Fidelity study, demonstrating that investors do see this theme as an investment opportunity.
However, in the short term, investors remain split on whether it will have a positive (21%), negative (26%) or neutral effect (52%). When asked about the top reasons for investing in a just transition, over three quarters (77%) of respondents chose “having a positive impact on the environment by achieving net zero”, alongside “having a positive impact on the society” (73%), highlighting the close connection between environmental and societal considerations.
Given this response, it comes as no surprise that 92% of the responses highlight the sector of renewable energy as the most attractive from an investment perspective, followed by technology and IT (61%) and agrifoods (60%).
In terms of asset class, 89% of investors believe equities will play the most significant role in achieving a just transition, followed by private assets (81%) and thematic investments (66%).
Shareholder engagement
Investor engagement with industries and corporates can come in the form of engagement opportunities with other value-chain participants through policy channels.
Fidelity International, for example, has a set of guidelines that they look at across the three key pillars of climate and nature impact, socio-economic equity, and communities. The company will carefully assess the assets in question and the context in terms of a just transition.
Fidelity can also show support for shareholder proposals, potentially through votes against intending agents, through public statements, or even filing shareholder proposals to implement strategy or disclosure, and then ultimately vote against directors who are failing to provide effective oversight if those are not proving to make change.
The key is to look at each company with its own set of circumstances, to look at all of the tools that the investors have, and to try to encourage and drive that progress because, ultimately, the objective of the shareholder engagement is to see change in the company’s behaviour and in real-world outcomes.
Social element
Shareholder engagement can be instrumental in addressing potential social problems that can arise from implementing a just transition.
For example, in the case of a utility company located in a country that is heavily reliant on coal-fired power generation, the engagement with the company may initially be focused on investors helping the company to acknowledge the necessity of transitioning its power capacity mix to one more dominated by renewable energy.
But as the engagement progresses, it could become clear to global investors that the company, which is state-owned, needs to really make sure they are effectively balanced out as it goes through its transition process.
Issues that have to be addressed here, for example, are the possibility of mass lay-offs involving hundreds or workers in a city or town where the company is the only employer.
Often, a lot of coal-fired generation plants are the main drivers of the local economy and employment; and hence, alternative arrangements need to be put in place to make sure that every stakeholder is consulted in the process.
