Investing in a Clean Climate
…And Enabling a Just Transition Towards a New Clean Economy
The year 2015 produced huge news in global efforts in confronting climate change and the global warming crisis. If you follow the news, you would be hard pressed to miss the recent Paris Agreement birthed by the 21st UN Climate Change Conference of the Parties (COP21) in December.
COP21 succeeded in obtaining a landmark commitment from 195 countries to address climate change globally. Among its highlights, the legally-binding Agreement calls for participating countries to lower their greenhouse gas emissions sufficiently in order to limit the increase in global average temperature to well below 2°C, and ideally at 1.5°C, over the century. In addition, the Agreement called on the countries to reach global peaking of greenhouse gas emissions as soon as possible.
“The deal, which was met with an eruption of cheers and ovations from thousands of delegates gathered from around the world, represents a historic breakthrough on an issue that has foiled decades of international efforts to address climate change (Davenport, 2015).”
In the forthcoming Responsible Investor Guidebook, to be published by Greenleaf Publishing in the late Spring of 2016, we praise the passage of the long-sought agreement but we also warn that workers cannot bear the full brunt of its implementation, as they have in other major policy shifts (even when those shifts are desirable).
As we say in the book, the outlines of a long, sustained market-driven production and construction surge is apparent, and smart (though cautious) responsible investors will lead this effort. Sharan Burrow, the head of the ITUC, said that 48 million new jobs could be created if green investment was lifted to 2% of GDP in 12 countries over the next five years. She also cautions that “there are no union jobs on a dead planet.” But like AFL-CIO President Richard Trumka, Burrows is concerned about the fall-out of these changes on people and communities. Trumka asserts that the movement toward clean energy should not make fossil-fuel linked communities and sectors bear the entire cost of change; we need a “just transition” for all working families and communities.
What’s in the Deal?
The Paris Agreement is an important step towards tackling global warming and its impact on growth and development. Per a Stern Review on the Economics of Climate Change, “business as usual”, that is not taking action to curb climate change, is expected to result in a 5-20 % loss in global GDP, a permanent reduction in consumption equivalent to the two World Wars and the Great Depression combined.
To achieve the Agreement’s goals, it is imperative that the world significantly reduce its reliance on fossil fuels (i.e. coal, oil and gas) and increase its investments in renewable sources of energy. The Agreement too called for developed countries to take the lead in mobilizing finance flows for climate related projects from various sources. From an investor perspective, such a transition is expected to present wide-ranging investment opportunities in renewables and clean energy.
According to a Huffington Post piece co-written by Ceres and the UN FCCC, “the International Energy Agency estimates that $68 trillion will be invested in energy up to 2040. Clean energy, energy efficiency and low or zero emission vehicles need to take an ever-increasing slice of this market if the promise of Paris is to be realized. Every sphere of the investment community needs to get on board. Of the $329 billion invested in clean energy in 2015, just under $200 billion was asset financing for utility-scale projects such as wind farms, solar parks and biomass plants. The next largest chunk, $67 billion, was spending on rooftop and other small-scale solar projects. Venture capital raised for clean energy was just under $6 billion. While these numbers may sound impressive, they are still precious little compared to the trillions of dollars that are needed from institutional investors every year to accelerate clean energy at the levels necessary to prevent dangerous climate change.”
As such, investors, particularly institutional pension funds, can be expected to pay greater attention to climate change related risk and return opportunities in their investment portfolios. One such opportunity, that often doesn’t get due attention, is focusing on the S (or Social) within the ESG (Environmental, Social, & Governance) framework.
A Just Transition
As the world prepares for a steady transition to a low carbon economy, some industries will benefit tremendously and create or retain millions of jobs while others, particularly those that are carbon-intensive, are expected to be hard-hit. In America, Appalachia and communities with the concentrations of coal and power industries in general are already feeling the brunt of the federal government’s proposals related to lowering green house gas emissions. While the move towards a carbon-free economy is in the right direction, we must ensure, as a nation, that such a transition doesn’t destroy the lives of workers and communities dependent on or affected by the declining industries.
An earlier report by the Apollo Alliance and Cornell University aptly summarises the characteristics of a just transition:
In developing an aggressive carbon-reduction plan, which will provide a tremendous overall benefit for future generations, we must ensure that the transition to a clean energy economy does not place an undue burden on this relatively small group of individuals, their families, communities and regions. Any system which places a price on carbon must include a sustainable, comprehensive program that serves as a catalyst for bringing these workers and communities into the clean energy economy. This program must be targeted toward those who have the least capacity to adapt, and must provide direct income and economic development resources to the hardest-hit communities. Such an investment is critical to rebuilding crumbling local economies and creating new opportunities for workers.
The report points to many examples in the American economy when workers and communities affected by major shifts in particular industries were provided federal assistance and local assistance in the form of income benefits, education and training, and access to employment opportunities. While the success rate of these programs has varied, and the report suggests many areas of improvement, without such assistance, displaced workers and their communities would have limited opportunities for adapting to the realities of the new economy.
Highlights from the reports key recommendations for a successful national transition program in America are as follows:
Provide Individual Assistance to Workers. This should include providing wage replacement, health benefits, and retirement contributions that enable displaced workers to maintain their standard of living; protecting older workers; providing training and education; and creating supportive services such as child care, housing assistance.
Provide Economic Development Assistance to Communities. This should include making targeted investments in local and regional economic development through clean energy investments; rebuilding America’s manufacturing sector; providing grants to local community colleges and worker apprenticeship programs that can help retrain workers; increasing support for Community Development Financial Institutions (CDFIs); and expanding support for community-based social safety net programs.
Undertake Environmental Remediation. This should include directing funds towards promoting innovative and sustainable techniques that revitalize lands damaged by carbon-intensive industries, and returning them to natural or productive use; improving drinking water quality and treatment of wastewater in carbon-intensives communities; improving waste product recycling; supporting investments in sustainable practices.
Provide Direct Assistance to Consumers. This should include providing protection from initially higher energy prices resulting from the transition, and assisting consumers in decreasing the amount of energy consumed.
The Obama Administration has worked to assist communities negatively impacted by changes in the coal industry and power sector, proposing $10 billion for multi-agency economic and workforce development programs and resources. Since Congress has not acted, it has funded smaller portions of that plan to assist workers and coal communities, and diversify local industry. But given the scale of the impacts on workers—estimated to be in the tens of thousands --we need to do more.
In the 1980s, the Redwoods Employee Protection Program (REPP) in Northern California, modeled on rail displacement programs, provided, for up to six years, 60%-70% wage replacement for loggers dislocated after the expansion of Redwood National Park. This Carter Administration program, which prevailed a legal challenge by the Reagan Department of Labor (DOL), provided some $100 million in total income maintenance, training, health and retirement benefits for 6,000 workers and their families. Workers displaced in many European countries have historically received transitional assistance for a much longer time than their counterparts here in the US. These are the examples of the scale we need to be at.
If we are to pursue the goals set by the Paris Agreement, and numerous other climate change initiatives, we must take into account the power of our most important resource - our workers - to successfully enable a transition that will not only improve our environment, but also create greater social end economic prosperity.
Capital stewards must face head-on the challenges of living in a global society. That includes climate change, which threatens the survival of our countries, economies and future generations, especially low-lying and third world coastal communities. Pope Francis released a landmark encyclical on the environment and humanity on June 18, 2015, called "On Care for our Common Home.” In it, the Pope warned of an “unprecedented destruction of ecosystems” and “serious consequences for all of us” if humanity fails to act on climate change. The UN secretary general and the World Bank president, among other world leaders, welcomed the encyclical.
Responding to this challenge will require a moral transformation, according to Francis, driven by changes in how we steward our investments, manage businesses, and protect people and our ecology. Hinting at some answers, the Pope gets very specific: "Investments have...been made in means of production and transportation which consume less energy and require fewer raw materials, as well as in methods of construction and renovating buildings which improve their energy efficiency. But these good practices are still far from widespread (Pope Francis, 2015).”
The Pope is also acknowledging, in this report, the importance of caring for people, especially those who are vulnerable. Coal miners and people who work in these targeted industry and energy sectors are our neighbors, our relatives, our brothers and sisters. They need more than 26 weeks of unemployment benefits and training programs that more than often don’t work. Let’s care for them too.
Additional contributions to the piece provided by Tom Croft. This article is part of a series highlighting key themes of the upcoming Responsible Investor Guidebook, to be published by Greenleaf Publishing and authored by your friends at Heartland Capital Strategies (HCS). For more information or to place an order for the book:
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 United Nations Framework Convention on Climate Change (FCCC): Adoption of the Paris Agreement. https://www.documentcloud.org/documents/2646274-Updated-l09r01.html
 Stern, N. The Economics of Climate Change: The Stern Review (Cambridge and New York: Cambridge University Press, 2006). See also, Apollo Alliance and Cornell Global Labor Institute - Helping Workers and Communities Retool for the Clean Energy Economy
 Apollo Alliance and Cornell Global Labor Institute - Helping Workers and Communities Retool for the Clean Energy Economy