Step 1: Build understanding around the just transition

5. key steps for the finance industry

This chapter provides practical guidance on key actions for firms to take to support a just transition to net zero. These are high level actions that apply across the main sub-sectors within the Guernsey finance industry.

5.1 Step 1: Build understanding around the just transition

Hot topics across the finance industry have moved from climate risk, to net zero, and now increasingly ESG and the just transition, with the present economic climate driving this up firms’ agendas. However, the relationship between each of these themes is not well understood. In larger organisations, they are often managed as distinct programmes operating in silos. Firms in Guernsey can be nimble here, and get on the front foot by starting with a holistic sustainability strategy centred around a just transition. This is one that weaves together net zero with ESG, rather than considering them as separate challenges.

Whilst the literature around climate risk and net zero has evolved substantially over the past 2-3 years, just transition has received significantly less focus. In the first instance, firms must start by establishing a strong understanding of the concept of the “just transition,” and the relationships between ESG and net zero. At its core, delivering a just transition for finance firms means developing a forward looking strategy to facilitate the transition to low-emissions alternatives, whilst balancing positive outcomes for people and planet via a holistic approach to managing environmental, social and governance risks and opportunities.

Just Transition

Forward looking strategy to facilitate a transition to a low-carbon economy, balancing positive outcomes for people and planet through a holistic approach to managing Environmental, Social and Governance risks and opportunities

Environment

Reduce GHG emissions in line with sustainable pathways, differentiated by sector and region to accommodate different ranges of economic growth. Include both emission reduction objectives and those targeted towards natural capital Social

Consider social impacts of portfolio re-allocation or policy withdrawal decisions; balance any negative screening or divestment actions with positive actions e.g. to invest in green infrastructure programmes in markets that are transitioning to support job creation Governance

Ensure that financial flows are aligned to companies with holistic sustainability commitments covering environmental, social, supply chain and human rights policies, alongside transparent disclosures demonstrating clear, senior stewardship and accountability

Broadening the scope of a firms’ strategy from net zero to just transition and applying systems thinking can help to identify wider value generating opportunities within and across each of the ESG domains. Beyond technologies to facilitate emission reductions, investment into ESG opens up a range of key sectors such as healthcare and education, alongside business and operating model improvements across the board. Studies have consistently shown that this can add financial value, e.g. through improvement of employee retention, or better risk management.38 Furthermore, ESG engagement can help to strengthen client relationships and develop more meaningful learning and knowledge sharing across investors and companies.39

To drive a truly holistic strategy centred around the just transition will require strong support and stewardship throughout an organisation, starting from the very top. This means more than signing up to the idea, but also the cultural and organisational changes it will require. It is critical to integrate these concepts throughout every team in a firm, as opposed to via siloed ESG or sustainability teams. It means setting this out as a priority, and investing in an educational campaign around why it is so critical, how it impacts the business model, and why it represents an opportunity to drive differential impact in the wider market. A critical element of a truly holistic strategy is how it is embedded throughout an organisation, from the operating model, through to processes, policies and decisions and the ongoing monitoring of those decisions. Given this is such a nascent field, never has embedding been as important as it is when considering a just transition, understanding the consequences of any actions and then course correcting will be critical.

Words alone will not be enough; the economics of course have to stack up. This means building a business case to substantiate this campaign with concrete numbers around the opportunity available to drive value and protect against risk. A growing number of sources can support this – including those cited in the tables in 5.2 overleaf.

38 NYU Stern, ESG and financial performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020, published in 2021