Impact investors can catalyze a just transition to net zero emissions
The 26th annual United Nations Climate Change Conference (COP26) begins on Sunday. At its heart is the global effort to formalize measures to achieve net zero carbon emissions by 2050 from heatwaves, hurricanes and floods. But it’s not just about protecting those vulnerable to increasingly frequent extreme weather conditions. Achieving our net-zero future will reshape markets, industries and, most importantly, entire communities.
Achieving the energy transition while doing good to communities most affected by climate action is known as ‘just transition’, a concept rooted in justice and human rights. Among other key objectives, financing the just transition is a crucial challenge.
The impact investor approach is uniquely positioned to meet the challenge. Their goal-oriented methodology can integrate social imperatives into just transition financing while introducing additional conditions for their investments to prevent, mitigate and address risks and impacts for vulnerable stakeholders. This would strengthen the leadership of impact investors in ESG performance, while demonstrating the art of the possible to the traditional investing community that has yet to embrace the impact-oriented approach.
How much transformation is needed to achieve a net zero economy by 2050?
Avoiding the worst effects of the climate crisis requires nothing less than a global economic transformation. The first of its kind from the International Energy Agency (IEA) Net-Zero by 2050 report provides a global roadmap to keep net-zero by 2050 within reach. It paints a startling picture of what the green economy should look like in just 28 years:
- Global energy demand will need to be 8% lower than today, but will serve an economy more than twice the size and a population of two billion more people.
- Almost 90% of electricity production must come from renewable sources. Solar power will likely be the largest source of total energy supply in the world and, together with wind power, will account for 70% of the renewable energy mix.
- Fossil fuels will account for just over one-fifth of the total energy supply (it is four-fifths today). These will mainly be used in goods where carbon is incorporated into the product, such as plastics, in installations equipped with carbon capture and in sectors where low-emission technological options are scarce.
What are the types of social impacts that can result from climate action?
A transformation on this scale is inherently disruptive. While essential to the health of our planet, the actions required to complete this transformation carry a range of risks for workers and communities. These occur at both ends of the transition spectrum.
Transition to exit
After more than a century of dependence on fossil fuels and carbon-intensive mining, we are beginning to see a tipping point in preparing nations to move away from oil and coal. As these projects sell out (often to less and less responsible companies, given their diminishing economic attractiveness) and close, what will happen to the workers who have built their livelihood around these jobs? To cities that have become inextricably linked economically to the extractive project? Will the affected areas be ecologically restored? These are crucial questions for the true achievement of the just transition.
At the other end of the spectrum, the transition to a renewable energy economy will be deeply mineralized. For example, if not carefully managed, lithium, cobalt, copper, iron and other minerals needed for the transition have huge physical footprints that directly threaten the newly asserted right to a healthy environment and own.
Once the minerals essential for renewable energy technology are obtained, new infrastructure will be required, which will raise many of the same human rights risks that the traditional energy sector has faced for decades: community agency and benefit from the use and acquisition of their land; the rights of indigenous peoples and the violence and intimidation that threaten them and other human rights defenders; unsafe and unfair working conditions on site and throughout supply chains; among others.
The renewable energy industry does not need to reinvent the wheel of social risk management. There are many lessons learned from other industries on how to effectively prevent, mitigate and address human rights risks occurring across the spectrum of transition.
Finance the energy transition over time and in the right way
IEA Net-Zero by 2050 The report mentioned above estimates that annual investments in clean energy must more than triple, to reach more than $ 4 trillion per year by 2030. This is roughly the equivalent of nominal GDP of Germany every year. Over the next three decades, this represents a total of more than $ 100,000 billion in clean energy investment.
This reinforces the many positive opportunities arising from investing in the energy transition – financial, social and environmental. For example, in 2019, Connecticut Green Bank reported that its $ 40.7 million in green investments attracted $ 312.7 million in additional private investment to the state, as well as the creation of more than 3 300 direct, indirect and induced job-years. At the end of fiscal 2019, Connecticut Green Bank’s investments reduced carbon dioxide emissions by 1.18 million tonnes, as well as more than one million pounds of carbon oxides. nitrogen and 662,949 pounds of sulfur oxides.
Obtaining the right transition as well as the funding is a challenge particularly suited to impact investors, due to their impact headings and the emphasis on returns beyond purely financial gains. This translates into an ability to incorporate developer criteria and requirements into project planning and conditions from the start, casting a shadow over the life of large infrastructure projects.
If we can better marry the human rights-based approach with impact investing, we give ourselves the best possible chance to achieve a just, sustainable and equitable transition. The United Nations Guiding Principles on Business and Human Rights are a key tool to help all investors integrate human rights-based principles into projects and investment conditions.
The focus of the UN Guiding Principles on Risks to People ensures that no potential opportunity to protect and benefit the rights of different groups in society is overlooked. They also clarify the limits of the duties of the state and the domain of the private sector, which is useful when the investor is unsure of the exact scope of the acceptable social benefits to be targeted through private funds or the way of creating synergies with State interventions. As for measuring impact, a rights-based approach can help articulate the delta to be measured, which can help avoid guesswork on what constitutes benefits and for whom.
The path to a just transition by 2050 is narrowing day by day. Introducing an explicit human rights-based approach to project conditions and measurement could not only improve the quality of the impact investment portfolio to achieve the just transition, but in so doing, attract other types of investors wishing to demonstrate the positive effects of their investments. We need more traditional investors – commercial lenders, high net worth individuals, private equity, sovereign wealth funds and others – to become impact investors backed by the human rights framework and play a key role alongside governments and community actors in building our network. zero economy.
Haley St. Dennis leads communications at Institute of Human and Business Rights, a global think tank that shapes policies, advances practices and strengthens accountability for integrating human rights into daily affairs.
Max Seawright is the Director of Communications for the Sorenson Impact Center