A Just Transition? Ignoring the social side of the climate crisis is a missed opportunity!

by Clare Keeffe, Senior Sustainable Investment Consultant - Barnett Waddingham

When we think about the climate crisis, we often focus on the need to decarbonise and the great opportunity that renewable energy sources can play in achieving this. There is no doubt this is true, but if we are thinking about sustainability factors “in the round” this approach misses some of the wider implications.

At Barnett Waddingham we encourage our clients to adopt a systems thinking approach to sustainable investing. Our concern is that, by thinking in silos, related aspects such as the social implications of the energy transition can be missed or ignored – running the risk of inadvertently going against some of the investor’s other beliefs. By ignoring them you are also potentially missing out on an opportunity.

In this article, we explore two social ramifications of not considering the energy transition systematically, and highlight the opportunity by applying a social lens in the first place.

Emerging market economies

It’s a sad fact that the emerging markets are most likely to be impacted by the climate crisis. This reflects their geographical position as well as their lack of funding to make appropriate adaptions to withstand the physical risks associated with climate change.

Many would argue that, when we look past the outsourcing of emissions generation from developed to emerging economies as a result of heavy industry such as steel making, the emerging economies themselves have contributed the least to the climate crisis we are now facing, noting that it is the developed world that have historically released the most carbon emissions in our atmosphere. The emerging economies themselves have contributed the least to the climate crisis we are now facing, noting that it is the developed world that have historically released the most carbon emissions in our atmosphere.

In environmental law there is a concept known as “the polluter pays principle” which effectively states that the cost of pollution should be borne by those causing it, rather than the person or persons who suffer the effects of the resulting environmental damage. This concept is often cited when discussing the “just transition” and is a very important discussion at COPs, including COP29 recently delivered in Azerbaijan

The opportunity

At Barnett Waddingham we have been considering “mega trends”; the shifts in our world order that drive investment opportunities for our longer-term investors like defined contribution schemes. One such mega trend is demographics.

As the great economist, Keynes once said “it is from human beings that every economy springs”, so it’s important to consider where those human beings will be in the future It is expected that our global population will continue to grow from our current position of circa 8bn people to nearer 10bn by 2060

However, this growth is not expected to happen uniformly across the globe, in fact a number of western countries’ population sizes may have already peaked. Instead, the majority of this global growth is will come from emerging market economies. What do all populations need to grow their economies and be competitive? Energy! McKinsey’s latest annual energy perspectives report projects that up to 95% of energy demand increase out to 2050 will come from the emerging markets.

So it stands to reason that there are fantastic investment opportunities in such regions as populations grow. As always, we encourage investors to consider geopolitical risks and diversification, but with the right strategy and a skilled manager, we see a great opportunity to generate strong risk adjusted returns.

Closer to home

The policy landscape in the UK is very supportive towards the energy transition. Since coming into power, the Labour government has introduced Great British Energy and the National Wealth Fund, both designed to fund early-stage development of projects needed for the energy transition

There have been some early “wins” for our new government too, not least the closure of the last gas powered steel plant at Port Talbot. Steel is one of the most carbon intensive sectors (often termed “hard to abate”) and the ambition is to now move to green steel. However, in the meantime this has a heavy burden on the community with the loss of jobs.

The opportunity

In general, there is often a focus on the development of the renewable energy, without considering the wider supply chain needs. We believe there is a specific opportunity here that could also assist in job creation and help to address some of the societal concerns often cited in relation to the energy transition underway

In summary, we encourage investors to think systematically about their investments in the energy transition. Think beyond the silos and emissions accounting approaches and take a social lens to investment opportunities too.