An estimated £2.2trn is currently invested in sustainable funds with a focus on climate. The Institute hopes to see over half of that invested in a fair and inclusive transition to net zero within the next five years.
The UK’s Impact Investing Institute has today launched a practical tool aimed at investors to ensure financial products and solutions are designed to advance a just transition to a low carbon economy.
The new tool, the Just Transition Criteria, was co-created and tested by 21 asset owners and asset managers with over £4trn (€4.6trn) in assets, or assets under management, as part of the Institute’s ‘Just Transition Finance Challenge’. These include impact investors, mainstream asset managers, pension funds and development finance institutions, such as Fidelity International, Schroders, Just Climate, Nest, and the Environment Agency Pension Fund.
The Institute said that an estimated £2.2trn is currently invested in sustainable funds with a focus on climate and that they hoped to see over half of those funds invested within the next five years in a fair and inclusive transition to net zero that left no one behind.
Fund managers will be able to use the criteria to build on existing standards, frameworks and initiatives they are already using for sustainable and impact finance, such as the UK’s Financial Conduct Authority’s proposed Sustainability Disclosure Requirements and investment labels as well as the EU’s Sustainable Finance Disclosure Regulation (SFDR).
Responding to questions from Impact Investor, David Krivanek, senior programme manager for the Institute who is leading the Just Transition Finance Challenge and the criteria initiative, said there was huge appetite for just transition finance from the asset owners and asset managers that the Institute was in dialogue with.
“Investors understand that we need to think about both the planet and the people living on it when applying investment strategies that aim to be long-term, sustainable, and secure risk adjusted market rate returns,” he said.
“That is true from a moral perspective, but also very much from a risk and business opportunity perspective. The main barrier that we hear repeated time and time again is that many investors that can deploy capital at scale are not clear on the steps they need to take to tackle both climate issues and rising social inequality at the same time. We hope that the Just Transition Criteria provide them a practical tool to address both of those challenges,” he added.
The Institute said it had also worked with NGOs, foundations, civil society organisations and other experts, including organisations that work with the communities most affected by the transition to net zero to reflect their views on how the criteria could be most impactful.
Three critical elements
The Institute said the criteria would provide asset managers and asset owners with a common framework and make it easier for fund managers to design and align funds to help deliver on the three critical elements of a just transition, identified by the Impact Taskforce, the G7-backed think tank led by the Institute and the Global Steering Group for Impact Investment.
These three critical elements are advancing climate and environmental action; improving socio-economic distribution and equity; and increasing community voice.
“The criteria provide clear guidance on how to structure existing as well as design new funds along those three elements of a just transition while leaving enough flexibility to be applied across geographies, investment strategies and asset classes,” explained Krivanek.
He said that to achieve this, the criteria had a three-tiered structure and provided practical guidance on how managers could demonstrate their contribution to a just transition “from articulating a product-level commitment to the just transition to the disclosures and indicators to show that no harm is done to environment and society, as well as the KPIs investors can use to demonstrate they contribute to just transition”.
‘Just Transition’ label
The criteria also include a proposal for a potential just transition label that would recognise the leadership and good practice of financial actors in adopting a just transition approach in their investments.
The Institute explained that a label “could further serve to catalyse financial actors to integrate just transition principles into their investment strategies”, provide opportunities for asset managers “for market differentiation and access to investment by asset owners recognising the label”, and provide asset owners with “more visibility and comparability between products intending to deliver a just transition, by validating such products’ application of the criteria.
Further analysis and assessment is being conducted by the Institute to ensure additionality and interoperability of any potential just transition label before one is launched.
The Just Transition Criteria were being launched at the Net Zero Delivery Summit taking place in London today.
Announcing the launch, Kieron Boyle, the new CEO of the Impact Investing Institute, said: “The world is facing two great challenges – the transition to a low carbon economy and tackling growing inequality. Both must be addressed together. Capital markets have a major role to play in being part of a solution, but many investors are not yet clear enough on what steps they need to take to tackle these issues. The Institute’s Just Transition Criteria are a practical tool that has the power to unlock trillions of pounds of investment with impact.”