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Why the climate crisis won't be solved without social justice

By Tom Nelson - Head of Natural Resources
Sahil Mahtani - Investment Institute Strategist

The fast view

There is a dangerous perception that the energy transition is a rich man’s game, along the lines of "save the planet, forget the workers." But transitioning to a low-carbon economy presents the most significant and urgent challenge faced by all of humanity today.

There is a pressing need for us to move from a carbon transition, to a just transition. One that engages with fairness, leaving no-one behind.

There are many challenges standing in our way, which this article will address. We refute two key arguments:

  1. Mitigating climate change is an ‘environmental versus social’ tug of war
  2. Decarbonisation is uneconomic, expensive and less efficient than fossil fuels

On the contrary, we demonstrate how a just transition can create more jobs and opportunities for workers and communities and provide cheap, efficient energy for all.

Our urgent message for asset owners, policymakers and individuals is to come together to act in support of the just transition.


Introduction

There is a dangerous perception that the energy transition is a rich man’s game, along the lines of “save the planet, forget the workers.” This year’s social unrest in the face of ecologically-focused policy changes across France, South Africa, Britain and the US might support this view.

But transitioning to a low-carbon economy presents the most significant and urgent challenge faced by all of humanity. While the case for it is ever more compelling, and the technology to support it rapidly transforming, there is a pressing need to engage with the fairness of the carbon transition. History provides examples of previous economic shifts, but none of the past transitions intertwine technological, social and ecological problems of this scale. We are at undeniable risk of inducing irreversible damage to the environmental systems on which life depends.


Source: Climate Action Tracker, 2018

In this paper, we aim to engage in the climate debate by showing how a just and fair transition can pave the way to a sustainable future. There are two arguments that we aim to refute. First, the view that mitigating climate change is an ‘environmental versus social’ tug of war where only one prevails. Second, that the process of decarbonisation is uneconomic and that renewable technology is more expensive and less efficient than fossil fuels. We hope to show how a just transition can reduce costs, protect the most vulnerable parts of society and halt the damage being done to our ecosystem. The cost of inaction, according to even conservative scientific estimates, is an increase in global temperatures of at least 3°C by 2100.

Figure 1: Regional temperature increase in a 4°C world, relative to 1890


Source: UK Met Office

The World Bank estimates climate change could force over 140 million people to migrate by 2055.

The average global temperature is likely to be 4°C higher than in pre-industrial times by 2100 if greenhouse gas emissions are not slowed – that means a 16°C rise in the Arctic.

How should investors navigate this existential threat?

Many already appreciate the importance of the carbon transition to asset prices. The risk of being stuck with 'stranded assets' as the world shifts away from fossil fuels is increasingly well-understood among investment firms, insurance companies, banks, regulators and governments. Yet the possibility of 'stranded workers' and 'stranded communities' as a result of the same carbon transition is only now starting to get the attention it deserves.

Moving the debate from a carbon transition to a just transition means we need to bring together the social and the environmental. The wide range of issues includes the asymmetric impacts of climate change on developed and developing regions; ensuring replacement jobs and employment; and ensuring that those jobs are fair and advantageous to workers and communities. Moreover, a just transition goes beyond workers and communities directly impacted and includes how we can provide cheap access to energy for all, including citizens in developing countries. It also must address how different nations share responsibility for carbon emissions (both past and future).

The private sector, in the form of technological innovators on one side and asset owners on the other, needs to drive this transition forward.

Many of these issues are contentious and complex. We need cooperation and support on an international scale with all countries, policymakers, businesses and individuals working towards a similar goal if we’re to achieve a just transition into a low carbon world. Governments do not have the financial firepower to pay for this transition and they do not have the political goodwill to afford any unintended social cost. With this political backdrop, it becomes increasingly clear that the private sector, in the form of technological innovators on one side and asset owners on the other, needs to drive this transition forward. Governments and regulators will be part of the solution, but private capital needs to be directed with urgency towards the corporations, the industries and the organisations that can enable technological progress and behavioural change.

But first, we need to refute the arguments that are holding back progress.

Argument 1: Mitigating climate change is an ‘environmental versus social’ tug of war where only one prevails

This view has been on display for most of the first quarter of this year on the streets of France as the gilets jaunes protested against President Macron’s increase in fuel taxes intended to fund eco-friendly initiatives.

Macron’s fuel tax was structured as a flat tax on motor fuel, thereby hitting the poor hardest. Moreover, the anger has a strongly geographic dimension, as suburban and rural residents were disadvantaged, given the relative paucity of public transport compared to densely-populated urban cities. In the UK context, approximately 28,000 jobs in the coal, oil and gas industries could be lost in the north of England by 2020, according to the Institute for Public Policy Research.1

These numbers pale when you consider a country like South Africa, whose dependence on coal for its growing economy make its competing environmental and social pressures more severe. More than 100,000 people are employed in South Africa’s mining, electricity generation, logistics and synthetic fuel sectors related to the extraction, development and export of coal. Unemployment in the country is already running at 27%; these are jobs that the country can ill afford to lose. In 2017, South Africa earned R61 billion (US$4.2 billion) in revenues from exporting coal. Domestic coal resources provided 91% of South African electricity.2

This dependence meant the backlash against the government signing contracts worth a combined value of R56 billion with Independent Power Producers (IPPs) in 2018 was significant. In March this year, the High Court of South Africa dismissed the application brought by the Coal Transporters Forum to block Eskom from entering into agreements with IPPs. The judgment reflects the development of the South African government’s Integrated Resource Plan 2010-2030 which, although recognising South Africa’s dependence on coal as its primary source of power generation, seeks ultimately to reduce carbon emissions and foster a balance of generation technologies.

South Africa’s severe social pressures with the carbon transition are not enough to win any ‘tug of war’ with its environmental pressures. Cape Town’s extreme drought in 2018 made this clear. The drought saw 4 million Capetonians subjected to severe water restrictions with the city only a matter of days from running out of water completely.

If people around the world ever thought that climate change is just a fable or a fiction, we in South Africa as regards [the drought in] Cape Town are now seeing the real effects of climate change” – President Cyril Ramaphosa.

But it does not need to be a tug of war between society and the environment. The concerns South African workers and communities have around IPPs, such as increased electricity costs and job losses, can be addressed if justice and fairness are core considerations of the energy transition.

We demand a just transition, which will ensure that workers at coal-fired power plants who may lose their jobs as a result of the transition from fossil fuels to renewable energy, will be trained and absorbed into the renewable energy sector.” – Irvin Jim, the general secretary of National Union of Metalworkers of South Africa, November 2018.

It then becomes an issue not of “either workers or the planet,” but “us too.” People are not against a carbon transition; they are against one that leaves them behind.

Have we achieved a just transition before?

'Stranded workers' left behind by a paradigm economic shift are not a new problem. It is worth analysing how historic shifts have been achieved, and at what cost. The deindustrialisation that began in the 1980s is the most significant in recent memory, but the biggest transition in today’s advanced economies prior to that was the decline of agriculture between the 1880s and the mid-20th century in western Europe and the US. That decline precipitated the impoverishment of farmers, who were overindebted, and who then gravitated towards radical politics in a number of western economies. Think of the rise of three-time Democratic party presidential nominee William Jennings Bryan in the United States or the Popular Front leader Léon Blum, who was elected Prime Minister of France in 1936.

A key part of the government response to falling agricultural prices was to put a price floor under farm products. The US did this as part of the New Deal’s Agricultural Adjustment Act. In Europe, the response took longer but was more comprehensive. The European Economic Area’s Common Agricultural Policy (CAP) set prices for farmers and offered an elaborate system of subsidies – which still exists today. While much-maligned, the CAP solved the most contentious distributional issue in European politics. That policy allowed the gradual shrinking of agricultural employment in a relatively consensual and cooperative fashion, thereby underpinning the modernisation of European economies.

As economic historian Harold James has pointed out, for France, agriculture accounted for 42% of employment in 1900 and still provided 22% of jobs at the beginning of the EEC in 1958. That figure is now less than 3% (2016 data), as it has been roughly since 2010. For Germany, the equivalent figures are 34%, 16% and 2%; and for Italy 59%, 33% and 4%. A decline of that magnitude could have been contentious, but government policy ensured that it was not.

Figure 2: Regional comparisons of the transition in agriculture employment

Potential jobs in the energy transition

There are currently 30 million workers who are employed in the traditional energy sector, of whom 10 million are employed by the coal industry alone. The social backlash in France and South Africa this year highlights a snapshot of the social implications that an unjust energy transition could have on countries, economies, industries, communities and workers. Some predictions say 7.4 million jobs in fossil fuels could be lost by 2050, yet more than 40 million jobs could be created in renewable energy, energy efficiency and grid enhancement and energy flexibility – and that's by 2030. A transition that generates more quality jobs will avoid resistances that could otherwise derail or halt it. We see this transformation of the socioeconomic system as one of the most important potential benefits of a just transition.

Figure 3: A just transition could generate over 40 million additional jobs by 2030


Source: IRENA, Global Energy Transformation, 2018

The potential growth of jobs in the renewable energy sector goes beyond predictions. There are currently more than 10 million people employed in the sector, 43% of them in China, and the number is growing fast. The International Labour Organisation (ILO) also supports the view that there is huge potential for jobs to be created both directly and indirectly across the value chain in the renewables sector. In Figure 3, the International Renewable Energy Agency's (IRENA) predictions are supported by its annual assessments. The 2018 report noted the strongest expansion of renewable energy jobs ever, highlighting steady growth.3

Figure 4: Global renewable energy employment by technology


Source: IRENA jobs database, 2018

Just and fair employment

Investors must be aware that a fast and prosperous new sector brings with it social and ethical challenges.

The failure to recognise Uber drivers' basic workers' rights, as concluded by the UK Court of Appeal late last year, is one example of a seemingly green company whose governance and labour practices were left wanting. A more sinister demonstration can be seen in 'blood batteries' where child labour in the Democratic Republic of Congo (DR Congo) is used for mining materials such as cobalt for use in batteries and electric vehicles. In both cases, the industrial process of decarbonisation through the rise in electric cars is creating significant human rights and labour issues.

In the DRC, there is an uncomfortable historical parallel with the exploitation of the rubber industry for tyres between 1880 and 1920 under King Leopold of Belgium during the last automotive ‘revolution.’ Where profitable industries have flourished in the past, so people and countries have suffered. This presents a serious conundrum for investors, who are trying to assimilate simultaneous environmental and social considerations.

This presents a serious conundrum for investors, who are trying to assimilate simultaneous environmental and social considerations.

The responsibility for investors is to engage with these companies and drive change. Just as fossil fuel companies can be pressured into curbing their coal output, so environmental companies can be forced to improve labour practices, employee rights and working conditions. We have seen many examples of this at first hand.

In its publication ‘A just transition towards environmentally sustainable economies for all,’ the ILO proposes four pillars to do this: Social dialogue, Social protection, Employment and Rights at work.

Four pillars of a just transition

Social dialogue

+

Social protection

+

Employment

+

Rights at work

The guiding principles of the pillars must include:

  • Strong social consensus on the goal of and pathways to sustainability
  • Policies that respect rights at work
  • Equal rights for all
  • Coherence across economic, environmental, social, education, training and labour policies
  • Employment protection, skills development and social dialogue
  • Awareness of and support for country-specific needs, including levels of development, economic sectors and enterprises
  • The importance of fostering international cooperation

A just transition ensures that jobs and working conditions are fair and beneficial to employees. If we embed these values as a core consideration into our efforts to drive change, they can be clearly preferable to jobs in the traditional energy sector and so will support an accelerated carbon transition.


To summarise this section, an ‘environmental versus social’ tug of war is neither accurate nor conducive to progress on climate change for the following four reasons. First, people are not against a carbon transition, they are against one that leaves them behind. Second, historical transitions show how smooth a transition can be if it mitigates rather than perpetuates the negative social cost. Third, the renewable energy sector is forecast to create more jobs than the fossil fuel industry, showing how social and environment considerations can work together. Finally, we as investors have never been more empowered to ensure those companies we engage with are driving positive and sustainable change. Our responsibility is to prioritise and accelerate that change.

Argument 2: The process of decarbonisation is uneconomic and renewable energy is more expensive and less efficient than fossil fuels

In the developing world, more than a billion people are without access to electricity and many suffer from an unstable supply. Insufficient energy is one of the main reasons why many people remain in poverty. In the developed world, affordable energy is seen as a basic human right, hence the outrage of the gilets jaunes in France earlier this year. With current policies supporting a global temperature rise of at least 3°C by the year 2100, it is undeniable that we need a global and comprehensive energy transition across the developed and developing world.

One of the main obstacles slowing down such a transition is the continued perception that renewable energy is expensive and inefficient. In reality, new and more cost-effective technology has brought us to a point where solar and wind energy are often cheaper than old primary energy sources, notably nuclear and coal. Increasingly, the near-term economics of these proven technologies support the ecological and moral imperative to push decarbonisation further, faster.

The near-term economics of these proven technologies support the ecological and moral imperative to push decarbonisation further, faster.

Prices clearly have further to fall, reinforcing the competitiveness of renewable energy power sources.

Figure 5: Levelised cost of energy around the world in 2020 in US$ per megawatt hour

Source: McKinsey Energy Insights' Global Energy Perspective, December 2017

The main challenge with this argument is that there are hidden social costs associated with implementing the transition that are expensive. These costs, or risks as we see them in investment terms, are crucial to renewable energy adoption and so should be brought into greater focus.

Hidden social costs are expensive

In the UK, where households spend a significant proportion of their income on traditional energy already, many would prefer cheap to clean energy. The problem in the UK is that even though the cost of renewable energy is going down, and oil and gas prices have fallen back, electricity prices are being pushed up. In the Cost of Energy Review, Dieter Helm argues this is down to hidden social costs, or in his words 'legacy' costs.

The electricity industry has less and less resemblance to a competitive market. The generator’s customer is the government, not [the end-user]. All new generation comes with a government-backed contract, which [the end-user] has to pay for… The prices [the end-users] pay have little to no relation to today’s costs. Instead, they include a cost pass through of these contract prices from past assets and past contracts.”

If prices do not reflect the competitive costs of renewables, then few customers will accept the argument that the energy transition is beneficial to them. Currently, customers in the UK are paying for the government’s poor past choices. The list of these poor choices is long and inglorious, culminating in the decision to build a nuclear reactor at Hinkley Point. It will be the most expensive power station in the world at a time when Britain’s offshore wind industry, for example, is enjoying a sustained reduction in costs. For the upcoming offshore wind auction in the UK, maximum bids have been set at £56/megawatt hour for projects coming on in 2023/24; the utility behind Hinkley Point (EDF) has been guaranteed £92.50/megawatt hour for the electricity. The UK government must “allow prices to fall and hence customers to benefit from the falling costs of renewables.” Until that happens, it risks undermining customers’ willingness to address climate change.

In Britain at least, there is hope. This year we saw the first week without coal-fired power generation in history, driving up public awareness and demand for cleaner energy. For other countries, however, these hidden social costs are rocking the foundations of the country with far more severity.


South Africa is one such country, facing potential low carbon transition losses of more than US$120 billion. Besides the risk of 'stranded workers,' a low carbon transition could have huge economic, financial and social implications, most notably due to falling coal exports. This is a serious issue that goes beyond household electricity bills to threaten the very economy, due to the country’s dependency on coal.

In its in-depth report, ‘Understanding the impact of a low carbon transition on South Africa,’ the Climate Policy Initiative describes the country’s marriage to coal:

Coal exports currently provide profits, royalties and tax receipts for South Africa when the revenue from selling the commodity exceeds production costs. Revenues from coal sales also pay back the sunk capital investment in mines and the rail and port infrastructure that is needed to get the coal to the market. If a global low-carbon transition prompts a fall in coal export revenues, not only might miner profits and government taxes be wiped out, there may not be sufficient cash to pay back original investments in mining and infrastructure. The debt defaults that might result could cascade through the economy.”

The energy system in South Africa is ripe for change and the mismanagement of Eskom under the previous regime makes this a key priority for President Ramaphosa. The Integrated Resources Plan, once finalised, must be ambitious in its targets for coal retirement and adoption of renewables. Furthermore, to achieve the Paris Agreement goals, South Africa will need to adopt even more ambitious actions by 2050 such as expanding renewable energy capacity beyond 2030, fully phasing out coal by mid-century, and substantially limiting natural gas use.

The extent of South Africa’s transition challenges is vast but, as we’ve discussed earlier in this paper, the transition is absolutely necessary. The environmental costs of water scarcity, extreme temperature exposure, climate migration and worse that will occur in a hotter South Africa far outweigh the investment and effort that’s needed now to mitigate climate change, extensive as it is.

All is not lost for countries and economies that have historically been very fossil fuel-dependent. We can look to China as a good example of a country with a large domestic coal endowment that has developed formidable domestic expertise in renewable energy, battery technology and energy efficiency. South Africa, along with India and Indonesia, can do the same, transforming their energy sectors completely, which will have a key bearing on global carbon emissions – and domestic economic sustainability – over the next 30 years.

There’s no doubt that South Africa will have to develop a wide range of policies to manage these challenges, but it is already making praiseworthy steps forward. In May this year, President Ramaphosa introduced a carbon tax after almost nine years of discussion and debate. It came just a couple of weeks after the ruling African National Congress (ANC) won a robust majority in the national election and only a day after the presidential inauguration. It is clearly a high priority for the current administration.

Hidden social costs are a serious obstacle for both developed and developing countries to decarbonise their economies. It is, however, not the case that clean energy technology is prohibitively expensive as a serious means of energy for all. We can, and must, achieve a just energy transition that simultaneously addresses social, economic and ecological impacts.

Public education is the next step.

Clean energy adoption requires education

When countries such as the US and western Europe have used up a disproportionate percentage of the world’s carbon budget during their own period of modernisation and industrialisation, where does that leave developing countries? They wish to modernise at the same pace, but are being held back by legitimate environmental concerns, which in some cases are not of their making. This is a recurring point of dispute at the Conference of the Parties (COP) meetings, sparking a debate over whether emissions should be measured on a per capita basis or per unit of GDP.

The trouble with this discussion is that it tends to focus on who is responsible for emissions rather than focusing on international cooperation and support for faster adoption of renewable technology. As we’ve shown, renewable energy is the fastest, cheapest and most efficient way to offer access to sustainable energy for all. That this point is not widely communicated despite clear evidence is a core obstacle for the carbon transition. Policymakers may believe they have their citizens’ best interests at heart, but they may in fact be slowing their access to cheap energy.


Take India, where currently coal provides 70% of the country’s electricity, even as 1.24 million citizens die annually as a result of the country’s choking smog, according to medical journal The Lancet. In India, the cheap coal that has fuelled the country’s economic rise in recent decades is vital for future growth.

We’re very concerned about the environment, but if you ask me to put it in the order of priorities, I would say having sufficient power for development comes first,” Power Minister R.K. Singh said at a conference in February. “Around the world, anti-coal movements are going on. Several coal-fired plants are getting shut. But we can’t do that.”4

This view is supported by Indian citizens who believe they cannot afford to turn off the coal plants because they think coal is the cheapest, easiest energy source. Public education needs to be a priority for more sustainable policy decisions to garner support. Continued economic and political willpower behind programmes like India’s National Clean Air Programme, public education about the damage of dirty air to health and, most of all, education that renewable energy can be a cheaper and safer alternative to coal are all vital steps to accelerate the transition.

To summarise this section, renewable technology is cheap and efficient, and costs are falling further. The real issue is hidden behind historical costs and the lack of public awareness of the benefits of clean energy. If we unpick these costs and drive transparent, competitive renewable energy markets across all countries, we can drive faster adoption of clean energy, which will help the carbon transition.

Transforming our thinking

Fundamental to all we’ve discussed is a humble acceptance that it is no longer a choice between business or society or environment. Business interconnects with society, which both depend on the natural environment.

As investors, the role we have to play in this transformation relies on four vital actions.

  1. Integrate environmental/decarbonisation and social considerations in mainstream analysis
  2. Recognise that the environment and social factors can sometimes be in conflict
  3. Engage with companies on these issues in a systematic and co-ordinated way and be prepared to drive change through this engagement process
  4. Focus on those companies that, through driving positive change, will see significant structural growth in the carbon transition, rather than simply divesting

Time for our generation to act

We are trying to solve the greatest challenge that humanity has ever faced and current policies are failing. The generations after us are not content with our efforts either. The recent youth climate strikes across the world reinforced why we need to take more urgent action collectively to accelerate the carbon transition.

The challenges are contentious and complex. We need to therefore transform our thinking and move the debate from a transition, to a just and fair transition that leaves no-one behind. The just transition will only succeed if it makes economic sense and wins broad-based popular support. This means cost-competitive technology, without hidden social costs. A three-way fight between business, society and the environment will be devastating for all three; we have already seen the warning signs.

We need to foster international cooperation and support among countries, policymakers, businesses and individuals working towards the same goal of decarbonisation. We now have the technology and the know how to achieve this.

As investors, the role we have to play in this transformation should now be clear. We must scrutinise and support those businesses that are driving positive and sustainable change. Our responsibility is to prioritise and accelerate that change.

As the chief of the World Meteorological Organization said, “we are the first generation to fully understand climate change and the last generation to be able to do something about it.” Let us not be the generation that failed to act.

To read our views on decarbonisation and how investors can act, visit Energy 3.0 on our Investment Institute website.


1 'Risk or reward? Securing a just transition in the north of England', IPPR, 22 October 2018
2 'Understanding the impact of a low carbon transition on South Africa', Climate Policy Initiative, March 2019
3 'Renewable energy and jobs', Annual Review 2018, International Renewable Energy Agency
4 'India’s deadly, dirty addiction to cheap coal is getting worse', Bloomberg, 8 May 2019


Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, issued February 2019.

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