Jane: [00:00:00] Hello and a very warm welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts about sustainability and finance. I'm your host, Jane Goodland, and this week I had the absolute pleasure of talking to Nick Robins, who, in addition to being my old boss, is a professor in practice for sustainable finance at the Grantham Research Institute at the London School of Economics. He's had an impressive career in climate change and sustainable finance, in fund management and investment research, and his work now focuses on how to mobilize finance for climate action in support of a just transition. This term is often quoted, but do we really understand what a just transition is, and to what extent do our climate transition plans include the people dimension? But before we listen to the conversation, a quick reminder to follow us so you never miss an episode. And don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use. Right, let's see what Nick had to say.
Jane: [00:01:03] Hello. Nick Robins, thank you so much for joining us on the LSEG Sustainable Growth podcast today. Really looking forward to this conversation. Now, before joining the Grantham Research Institute, you led the UNEP inquiry into the design of a Sustainable Financial System now that was launched ten years ago, in fact, ten years and three days, to be precise, back at Davos. So, tell us a bit more about that and why it's so important to really set the scene for what came after.
Nick: [00:01:29] Yeah, no, exactly. As you, were saying, 2014, January, this, very, long titled initiative called The Inquiry into design of a Sustainable Financial Initiative was launched by the United Nations Environment Program. I was co-director of that. And essentially that was, I think, capturing a moment where sustainable finance was moving from just being about particular assets or particular portfolios, and a recognition that it was becoming much more of a system wide issue. I think the focus after the financial crisis, realising that the financial system itself was not as stable as we thought, and that to achieve sustainability objectives like climate change, we really need to think of the system as a whole and not just its component parts in terms of particular transactions or assets. And so what we were looking at is how the rules of the game need to change. What does central banks need to do, financial regulators. And how do these different pieces come together. And we produced our report just before the Paris Agreement in December 2015, which had this particular commitment to align financial flows. So that was, I think, a spirit of that. And then it fed into the whole G20 process, which really sets the global financial architecture when China, quite to the surprise of many people in the West, I think, adopted green finance as its only new priority in its 2016 G20. So that was really, I think, the start of an era of sustainable finance, which I think has probably now run its course. And we're in, I think, the beginnings of a new one in this very, tricky and fractured, global environment now.
Jane: [00:03:02] So that takes us to more current times. Now you're at the Grantham Research Institute within the London School of Economics, and your work is on how to mobilize finance for climate action to support a just transition. Now we're going to talk about just transition in this episode today. So, I think it's important that before we go any further, what do we mean when we say just transition? Are we talking about a transition that is fair across the world, or are we just talking about a transition that puts the impacts and risks and opportunities for people associated with the transition? So, help us understand that a bit more.
Nick: [00:03:41] Yeah. And I think also the just transition may be a new phrase to many people, but certainly within the sustainable finance world, it's really about saying we have particularly a climate priority and E in the ESG or nature, and obviously we have S, but generally speaking, both in investment and in policy, we separate those two things in silos. And I think we're increasingly seeing that actually, if we want to move fast on climate and also restoring nature, then people have to be at the heart of it. And just transition is the framework that has come up for that. So, in a sense it has a number of dimensions. So firstly, it is about fairness. It is the right thing to do. It's the right thing to do that as we are moving to a net zero economy, a resilient economy, that actually human rights are respected in the workplace, labour rights in communities and so on, and that no one is left behind. So as fossil fuel assets are phased out in the UK, we've got a case at the moment of a coal fired blast furnace being closed down and lots of concerns about workforce being laid off. So that's sort of one area that is an issue of fairness, of principle making sure people aren't, left behind. But then I think there is a question of, opportunity. And I think this is also, is about so that maybe the first was looking at the risks, as you were saying, Jane, but then the opportunity, we can shape the net zero transition. It's not a fixed we can shape it. So actually, it's going to be better, for us, particularly in terms of gender equality in the workplace, for example, in the energy sector, we're also going to need to build a new net zero workforce, and that's going to require investments in skills and training in different parts of the world and revitalizing economies. And the third piece, I think so it's a fairness issue. It's the right thing to do. It's the necessary thing to do in terms of public trust. But I think for business and finance, I think the one thing we've been trying to explore a bit as well is that it's the smart thing to do, because companies are going to have to rebuild their business models. And how does this dimension of people in the workforce, in supply chains, in communities and then consumers as well? How does that become the smart thing to do in terms of new business models, whether in the so-called real economy, energy, transport or whatever, but also in terms of investors, how investors are now evaluating company performance.
Jane: [00:05:59] And this also plays out geographically as well, doesn't it? Because a lot of the conversations that I've seen about just transition do focus on the divide, I suppose, and the gap between climate transition and emerging economies or developing countries and those in wealthier nations. So, is that right to think about that dimension, too?
Nick: [00:06:18] Absolutely. So, I think there are some general principles, in terms of, making sure that we do assess these social risks, impacts, do take advantage of the opportunities and make sure, in particular, those who are affected are at the table making helping to make the decisions in terms of workers or communities. And then it is every sector, and all parts of the world. So, it's happening here in the UK, in Europe, in the US and so on. Big issues around just transition in the energy sector, EVs, the shift from internal combustion to EVs has big implications for workforce and so on. But I think you're right that if where we need to actually place most emphasis, particularly in the investment community, is in the so-called emerging economies in the global South India, China, South Africa, Brazil, Indonesia, where these countries have huge development needs still to be delivered. And how do we shape the net zero transition, so that is happening. And these countries have relatively limited fiscal space. They don't necessarily have very well developed welfare states. So, if we're thinking about phasing down coal in some of these economies, that has big development implications. So, we do need to think about those issues. But also, as these countries are developing, and we do a lot of work in India. I mean, India could well be the green jobs superpower of the 21st century if it really takes forward this agenda. So yes, I. The priority is in those economies, both on the risk side, but also on the I think, transformational opportunity side.
Jane: [00:07:47] When you say it, it sounds so obvious, and it's so sounds so sensible that you'd put people at the heart of a climate transition. So why do you think that the climate action that we've seen so far perhaps hasn't prioritised the people angle as much as you're arguing and we're talking about really should have happened?
Nick: [00:08:05] I think there are two things. One, I think is only really recently in the last 2 - 3 years, that we've realised the structural change that actually getting to a resilient net zero nature positive economy is going to be. This is not incremental change. And therefore, that does involve big issues for jobs and workers and communities. And I think also perhaps, maybe some of the framing of climate action has been a little bit narrow. I think, for example, climate change is a market failure. Prices don't reflect the environmental costs of carbon pollution. Let's put a price on carbon and markets will find a new equilibrium. All will be fine. I think that has a certain logic to it, but actually thinking through the consequences of what that means, and that was what led to the ‘gilets jaunes’, the yellow vest protests in France, where you had a very sort of rational policy by President Macron to raise the taxes on transport, but not thinking through what that would mean for certain categories of users of transport. So, I think it's actually making sure that as decisions are made, as we deal with the externalities, to use the jargon, that actually the social consequences are thought of up front, not as some afterthought. So that one they are successful, but also that actually the public trust we need is built. And that as we see in every economy, there is a certain nervousness now, which to some extent is legitimate, but also is being manipulated by political forces to try and slow climate action.
Jane: [00:09:37] But that just makes it really important for every actor in the economy to understand their roles. So, as you said, this isn't going to be solved by the investment community or the private sector alone. It can't do that because it needs the right operating environment and the policy environment and sensible policy decisions, doesn't it? So, it just underlines that the state has and has an incredibly important role to think about national transition plans, which are then conducive to putting people at the heart. And then the private sector can also lean in through allowing the market to do what it can do. But this is absolutely a systemic, all hands on the table, all sleeves rolled up, isn't it?
Nick: [00:10:21] Absolutely. And I think as you laid it out, there's a very good example. So, in a sense, just like broad climate policy, governments need to have their net zero plans and for every section of the economy. But it's governments who do skills and training policy, do regional policy, SME enterprise development, all the things you're going to need for a for a just transition. And businesses obviously can contribute to that. I mean, one of the examples in the UK, I think is quite interesting looking at one in the energy sector, you have the energy utility SSE, which has been a real leader in moving away from fossil fuels into renewables and so on. It's based in Scotland and within Scotland, there is a clear policy signal that the country really wants to make sure that it's going to deliver net zero through a just transition. It's really quite pioneering. So, there's that policy signal, for that particular company, SSE, but also there is an investor signal. The investors were actually starting to get in touch with the management at the AGM’s. And so, and said, yes, we need a net zero plan and targets. But in terms of the implementation, how that is done, we would like you to actually start considering a just transition strategy for workers, communities and so on. And that came through. And that is not just a piece of paper, but I think has been quite important for the company in terms of the way they think about developing their new workforce, the way they engage with the communities, how they deal with the assets that they do need to phase down. So that was, I suppose, a first start that shows that actually how we do get systems working, it's not either or, but you do need that policy signal. And also, then the connection to the investors, both as stewards of assets and also as allocators of capital.
Jane: [00:11:58] An integrated approach. So, not thinking about government policies in their own right, but really thinking about the impact of climate transition and just transition across all government policies. And maybe that's the harder one. But that's probably for another episode, I should imagine.
Nick: [00:12:13] Yeah. Joining those dots as they say. That's right.
Jane: [00:12:15] So this year we're going to see lots of companies publishing their climate transition plans. So, should we be looking out for the people dimension of those plans? And what exactly should we be looking for?
Nick: [00:12:26] So I think, there is increasing consensus about what a credible transition plan looks like. In terms of actually how companies are going to take these often quite distant targets and put them into business models. So, you need clear sense of corporate ambition as the sort of first pillar you need to set out the implementation. What that means your products, your services. You also need to have an engagement strategy because as we know, companies on their own, can't deliver however big you are. You've got a supply chain, you've got customers, maybe the policy frameworks. And then the engagement then is particularly when you're talking about your workforce, the workers, trade union dialog with communities and so on. Then governance, clearly. And actually, a lot of the just transition is a governance thing is about how you decide things, who's at the table. And finally, the metrics. So, what we've done actually within this transition plan taskforce in the UK is actually set out very clearly how the just transition aspects can be woven in. And I think we need to see these plans coming through and we're seeing more plans coming through. Just in earlier in January, HSBC, one of the UK's largest banks, came out with its net zero plan. And we saw just transition, woven through. But I think the plan is, in a sense, a start. And what we really need to do is how this is then going to be used about mobilizing capital, which is when we can think about how this is linked to loans and sustainability linked loans, or how this is linked to the bond market, which has obviously been a very creative place about how you connect, particular assets to sustainability outcomes.
Jane: [00:13:57] So let's move a bit more on to that. And I want to focus as well on, energy, because really energy is at the kind of bedrock of the transition. And I want to kind of see if there are some innovative financial approaches that we can look at because this is not yet full mainstream, really, in terms of the way that capital is raised, aligned with climate transition. But I think there are a few examples coming through that you might want to share with us.
Nick: [00:14:24] Yeah, I think in, sort of development of a sort of system change, to use the way you phrase you're using, Jane, I think we're at the sort of early adopter phase. So, we are seeing governments, and we were talking earlier about sort of, governments in the emerging markets. You've seen they then setting forth their plans, particularly South Africa, but also other countries and then forming partnerships with countries in the industrialized world called JET Ps, Just Energy Transition Partnerships. So South Africa, you've got Indonesia, Vietnam, Senegal all very different because very, very different economies. These are still very early. In Vietnam and Indonesia, what is interesting is it's both, there's provision of some public capital. So, in a sense development, finance, but also there are some commitments from private institutions, particularly banks as well. So, in Indonesia, there's 10 billion of public and 10 billion of private. So, these are test cases. And I think certainly from listening to, some of the Indonesian leaders at that the climate COP recently really interesting about these high how these high level partnerships are going through into the domestic public institutions, how they're dealing with private organizations, and how this cascades down to communities that are affected by the transition, either by the phasing down, or early retirement of coal or by the phasing up of renewables. So that's one. But I think there's also areas, maybe in the private capital markets that are coming through as well. And we've been particularly interested in a case we found in Chile, in fact.
Jane: [00:15:52] Is that something you can go into a bit more detail about?
Nick: [00:15:54] So one of the things as we were looking at this case study of Engie in Chile, which was really interesting, was this was designed, this sustainability linked loan, to attract private finance from institutional investors. Now, institutional investors have set themselves sort of climate goals and targets. And often they include not investing in companies which have a certain percentage, particularly of coal in their generation mix. So, this was a case where you had a company Engie Chile, which did have a relatively large proportion of coal, but was committing and using the sustainability linked loan to move away and actually phase it out and move into renewables with energy storage. And doing that in a way that was meeting its social obligations and was a just transition. So, investors are quite rightly moving away from fossil fuels, phasing out fossil fuels because they are unsustainable. But I think the other reason why investors are moving away is it increasingly markets are telling us that they're also unviable, leading to the risk of stranded assets. And one of the reasons the just transition is so important is stranded assets is one thing. But also, there's the risk of stranded workers, stranded communities, indeed stranded countries. And that creates the macro effects which obviously are not good for individual peoples and societies, but also rebounds to the detriment of investors as well.
Jane: [00:17:17] Yeah. And in terms of you said that these are really good examples. We're in this early adopter phase. How do you think that we might move forward from this. Are we likely to see that ramping up quickly, do you think, now we're starting to see models and we can see replication of those types of deals coming through. Is that what you envisage?
Nick: [00:17:36] Well, we hope so. I mean I think a couple of things I mean we talked about transition plans. I think again, we can't think this is going to be the silver bullet, which is going to solve all problems. But it does mean that we move into a much more solid governance framework. So, we get sort of just transition commitments and indicators there. We then turn to the capital markets. We've got a partnership with the Climate Bonds initiative to say, okay, we've got green bonds, we've got social bonds, sustainable, sustainability links. There seems to be a lot of potential to see how this just transition imperative is included. So green bonds you're investing in let's say building retrofit. How are the issues around the workforce for doing building retrofit. How are they incorporating this. How are the community dimensions and so on. So that's one particular area we're looking at creating. And I think within the broader transition debates, energy transition, we've been talking about a lot. But I think for nature as well, often we're now starting to think in terms of s-curves in terms of these exponential growth. And that has worked very well in terms of technology, renewables, EVs, heat pumps and so on. We're seeing those learning curves. So exponential growth. And I think we also need to see those S curves in other parts of the sustainable finance. And to me, the just transition is a form of social innovation that we could see early adoption take up and then really quite, mass implementation and changing of, practices. That's my hope at least.
Jane: [00:18:59] Yeah. And I think in terms of thinking about what that adoption curve might look like, one of the things I've been thinking about is how we're starting to have the market infrastructure to enable organisations to raise capital in with those sustainability guardrails, whether it's a green bond or social bond. But. How do we how do we incentivize organisations to choose those options? Because I think that is one way to align capital with sustainability outcomes. But at the moment, it doesn't strike me that it becomes obvious to do. Obviously, some of the organisations that the vanguard are choosing to take that approach. But is there something that you've come across that you think would help to stimulate that take up?
Nick: [00:19:44] Well, I mean, this is where to some extent we can do that through the market. Obviously, you can do that through business to business relationships and so on in terms of specifications. So, I mean, companies buying from other companies can say we need a credible transition plan. And we need you to show how the just transition dimension is dealt with. But that comes back to public policy as well. And I suppose we see, over in the US Inflation Reduction Act, which is a multi-dimensional thing in many ways to kick start technological development again in the heartlands of the US, very clear, labour principles attached. So, it has a sort of it's just transition implicitly. And clearly there are very clear fiscal incentives for companies to invest in the US to do things linked to the transition and green, but to do that with provisions in terms of good work and so on and so forth. So that's maybe one example just to put in as a comment that's a very attractive route, let's say for the US. But many developing and emerging economies are saying, well, hang on, this is really protectionist because you're pooling the investments into your country. But actually, we're the people that really need the investment. So, I think the incentives. Yes. And I think that's probably the biggest game in town in terms of actually how incentives can be used and actually linked for both green and particularly labour and community decisions. But actually, we do need to think we are still in a world that relies on international supply chains. And we do need to make sure that these provisions actually lead to positive outcomes in the developing world, where most of the investment really needs to happen from a climate perspective.
Jane: [00:21:18] Interesting stuff. Nick. I love talking to you because literally, I come away with so many ideas and, a long list of things to do, actually, most of the time. Let's think about what's next on your agenda, because I'm sure you've probably got something exciting up your sleeve. So, what does this year look like for you?
Nick: [00:21:37] So at the LSE, we've been working on just transition how to make it real in the financial sector for a number of years now. We really see this as a strategic priority, so, we can speed, climate action also action on nature. So, in February this year, 2024, we're going to be launching what we call our just Transition Finance Lab. So, this is really going to hopefully be a catalyst to speed us up that adoption curve. And particularly we've been listening to the pain points of financial institutions. So, people say yes we get just transition. But how so we are going to be focusing on particular instruments and strategies. So, we touched on bonds already. So that's one we're focusing on. People say well what does good look like. How do we measure it. So, we're focusing quite a lot on what are the metrics. And again, we don't need to reinvent the wheel. There are social metrics out there. So how do we bring those together. And again, there are assessment frameworks like the TPI Transition Pathway Initiative framework which is used so we can build on that. So, metrics is the second policy again focusing on policy. What are what policy frameworks really do provide the incentives and rules for businesses and finances to do that. And then the final thing, again, as sort of a pain point or a puzzle point that people have is, can you show me some examples? We've discussed a couple here. By no means are they perfect, and the companies involved wouldn't claim to be perfect, but we're starting to develop a focus on, case studies on this emerging practice. Really to hopefully embolden people to say, ah, I could do that, or that's interesting, but I could maybe do it better or I could adapt it. So that's going to be something we're going to be doing as well. So, we're very interested in, I suppose, working with institutions who want to apply and want to really think about applying this and get some real practical applications going. So, that's what we're going to be doing. And I hope to talk to you later about that. Jane. And also, the people on the line.
Jane: [00:23:28] Yeah, brilliant. So yeah, do come back, some months down the lines and talk about the just Transition finance lab. And I'm sure we can put some information out there for people to find it. Is there a website or do they go to the Grantham Research Institute?
Nick: [00:23:42] It's coming soon, and it will be launched on the 20th of February. So, if you want to put a date in your diary, but I mean, yes, it's going to be on the Grantham research website.
Jane: [00:23:49] Brilliant. Thank you so much. As ever, it's been brilliant to speak to you. Thank you so much for sharing your experience and everything that you're doing. Nick, thank you so much. Indeed.
Nick: [00:23:57] Well, thanks Jane, and thanks for your leadership. It's really good having these conversations.
Jane: [00:24:02] So that's it for this week's episode. And what a fascinating chat that was. Big, big thanks to Nick for sparing his time to be with us on the LSEG Sustainable Growth podcast. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at FMT@lseg.com. That's all from me but watch out for the next episode very soon.
