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Step 2: Develop a just transition strategy
5.2 step 2: Develop a just transition strategy
Applying the wider ESG framework throughout net zero strategy is critical to ensuring a just transition. Net zero is still a relatively new discipline for financial services firms and the landscape is fast evolving. Substantial variation exists across firms’ net zero commitments, driven by differences in scope, methodologies, and the availability of data.
To help drive consistency and support the industry in transitioning, a range of frameworks and tools have emerged. However, there is still limited guidance available on how to apply these within the context of the just transition. To do so, firms will need to use a range of sources, combining available tools and sources that outline the key ESG risks across sectors and geographies today, with forward-looking, science-based net zero scenarios to outline changes required within these sectors to meet the energy transition challenge.
Science-based scenarios come from credible sources, and differentiate between key sectors and markets that will adapt at different rates to enable continued growth in emerging markets.40 Whilst these scenarios are primarily focused on emissions reduction metrics, they often provide useful data on the level of investment required and jobs created to facilitate the transition. Collaboration with sustainability SMEs to build on these scenarios and develop qualitative, forward-looking narratives around the just transition – such as those outlined in section 4 – can be useful tools to help guide strategy development.
Example questions to ask during forward-looking analysis around a just transition:
When is the right time to disengage from high-emissions activities, to align with the net zero future?
Which sectors/jobs are being displaced, and what social, environmental and economic value do they contribute?
Are there initiatives we could support to help promote transferability of this value into new industries, jobs and skills?
The below table outlines key activities for firms to consider when developing their just transition strategies, supported by some examples of key frameworks and tools that can be helpful.
Map out main sectoral and geographical exposures across a firm’s value chain; heatmap key sectors and regions within high ESG risks today. If sufficient data exists, measure baseline emissions associated with a firm’s portfolio, where methodologies are available via the PCAF standard. Sector-based proxies can be used as a guide where data is not available. B: Explore forward-looking scenarios to estimate how they might evolve
Perform forward-looking analysis to consider how the key ESG risks identified could evolve in the transition to net zero; use a comprehensive range of sources across ESG themes, and identify both risks and opportunities to help manage and mitigate them. Firms can use net zero scenarios, or can use external tools from third party providers.
Define sustainability goals, including a holistic range of Environmental, Social and Governance objectives, e.g. emissions reduction targets aligned to net zero, alongside social KPIs, engagement targets and sustainable finance targets with both social and climate/ green products, as well as transition-labelled products
S&P Global, Refinitive, Sustainalytics, MSCI and CDP can all be useful sources to evaluate exposure to ESG risks across sectors, regions and through individual companies.
To understand portfolio emissions, PCAF has emerged as the industry standard for emissions accounting across the finance industry; the standard currently covers these asset classes:
Listed equity and bonds Business loans and unlisted equity Project Finance Commercial Real estate Mortgages Motor Vehicle Loans
In addition, in 2021, consultations were issued on the following: Green Bonds, Sovereign Bonds and Carbon Removals Capital Market instruments
The world Benchmarking Alliance’s Just Transition Assessment41 is the best available source that currently evaluates company-level transition to a low carbon economy, in the context of just transition
Science-based net zero scenarios can support macroanalysis of how firms’ business models and portfolios in the transition to net zero, across key sectors within their portfolios. There are a number of credible sources:
IEA NZE IPCC RCPs IRENA NGFS PACTA: Paris Agreement Capital Transition Assessment
To support firms in evaluating exposures at the company level, additional helpful tools are:
Climate Action 100 Transition Pathway Initiative Other private tools42
Appendix A: Specific guidance on the just transition is limited, however the PRI has provided some high level guidance for investors and the NZIA for insurers.43
Appendix B
Appendix C: A range of target-setting frameworks and initiatives have emerged. The most popular are:
SBTi – Science Based Targets Initiative – covers a range of sectors (not limited to Finance)
GFANZ & UNEP FI – for all sectors, with consistent principles on net zero, and specific commitments led via the industry initiatives:
NZIA – Net Zero Insurance Alliance
NZBA – Net Zero Banking Alliance
NZAOA – Net Zero Asset Owners Alliance
NZAM – Net Zero Asset managers Initiative
41 World Benchmarking Alliance, 2021 Just Transition Assessment, November 2021
42 For further detail on some of these tools, UNEP FI have evaluated a range of solutions available to measure climate risk, The Climate Risk Tool Landscape: 2022 supplement – United Nations Environment – Finance Initiative (unepfi.org)
43 PRI, Climate change and the just transition: A guide for investor action, 2018, download (unpri.org), and NZIA, Insuring the net-zero transition: Evolving thinking and practices, April 2022, Insuring-the-net-zero-transition.pdf (unepfi.org)
Although navigating this so-called “alphabet soup” can feel daunting, consensus is starting to emerge in some key areas such as emissions accounting and disclosure. Guernsey has the benefit of having a fast, nimble regulatory regime, which enables it to quickly respond to these standards as they evolve, and to do so in a flexible and proportionate manner.
Whilst the above steps will not be directly applicable to the wider community of financial advisors and administrators within Guernsey, there are nevertheless key opportunities within each of these areas to provide differentiated offerings, data solutions and advisory services to clients in the industry.
Key principles to support firms in developing their transition strategies:
Initiative: Just start somewhere. Smaller firms may feel that a lack of resources/skills mean they have no capacity to act, but they absolutely do. Just starting somewhere – even if they are small first steps – is better than not starting at all
Sponsorship: Get your key stakeholders bought in early; don’t neglect the need for both education or raising awareness, alongside cultural change, led by leadership behaviours
Accountability: Clear KPIs and objectives tied to clear milestones that drive action in the short term as well as the long-term
Pragmatism: data, for example, is not going to be perfect – but don’t let the perfect be the enemy of the good. Qualitative data can be a good supplement for gaps in quantitative data, whilst using your influence to articulate the type of data you need.
Materiality: start with a scope focused on the areas within your value chain that are most material to the transition challenge and your business, and build it up over time
Holistic: Don’t view any individual carbon reduction or net zero objectives in isolation. View within the context of wider E, S & G impacts (or the UN SDGs) and establish goals or objectives linked to each, to help support the just transition
Embedded: include across the operating model, from processes, to policies procedures and management information, including the ongoing monitoring and course correction – it won’t be right all of the time, but should be directionally correct
