Transforming the financial system: an inclusive, people-centred approach
From presidents to grassroots activists, workers to investors, the just transition is increasingly recognised as essential for accelerating climate action. The task is how to reallocate financial flows so that climate goals are achieved alongside positive social outcomes, particularly through additional investment in the Global South. The meeting of the 29th Conference of the Parties to the United Nations Framework Convention on Climate Change must make breakthroughs on international goals and mechanisms, national frameworks and transition planning for business and financial institutions.
The just transition puts people at the heart of building a net zero and resilient economy. A top priority is to maximise the opportunities of climate action to cut inequality and end poverty, by expanding clean energy jobs, ensuring they come with decent working conditions and bringing universal energy access in all parts of the world. It also means anticipating and addressing the social risks of the transition, such as avoiding stranded workers and communities as fossil fuels are phased out, and ensuring the race for critical minerals respects human rights and brings genuine local development.
Inclusion is essential
The centrality of participation is crucial. Those affected must be meaningfully involved in decision-making, through social dialogue in the workplace, broad stakeholder engagement along global value chains, and free prior and informed consent by Indigenous peoples. In every country and every sector, the transition will not happen on time unless it is fair.
Awareness of the just transition has been building across the $450 trillion in assets sitting within the global financial system. Some finance ministries with fiscal space are linking fiscal incentives to good jobs and community benefit (as in the United States). A handful of pioneering just energy transition partnerships have been agreed in South Africa, Indonesia, Vietnam and Senegal, but the roll-out of actual public and private finance from developed countries has been slow.
Institutional investors with tens of trillions in investments have made support for the just transition a core net zero expectation of the companies they invest in. But at the end of 2023, only 3% of the most carbon polluting companies held by these investors had released plans involving stakeholders. A recent assessment of nearly 40 major banks found that although some had started, none had explicitly committed to decarbonise in line with just transition principles.
In the developing world, international flows of public and private investment are going in the wrong direction, with mounting debt often crushing the ability to turn aspirations for a just transition into reality. A transformational approach is required, one that confronts the structural inequalities that prevent the just transition from taking off, not least in Africa.
Getting on the right track
A systemic solution is needed that shows how the full spectrum of finance from public through blended to private finance can implement the just transition. This will involve finance ministries, central banks and financial institutions, multilateral and national development banks, and commercial financial institutions as well as business, trade unions and citizens. Many decisions need to be taken beyond COP29, but the UNFCCC is perhaps the best opportunity for focused attention, following the approval of the world’s first dedicated work programme in 2023. Three priorities stand out.
First, the primary goal of this year’s COP is the agreement of the new collective quantified goal to provide adequate, accessible and affordable finance to achieve net zero, build resilience and pay for loss and damage in emerging markets and developing countries. The Independent High Level Expert Group on Climate Finance estimates that those countries, excluding China, will need $1 trillion in external financing every year by 2030 for climate and nature action, a considerable jump from the existing $100 billion climate finance goal.
Around $600 billion of this needs to come as international private finance, more than 15 times higher than current levels. Much will require partnerships with multilateral development banks and other development finance institutions to reduce risks, for example through co-investments and guarantees. The full $1 trillion must be invested in line with just transition principles, including ensuring respect for human rights, along with the provision of dedicated funds for specific priorities in EMDCs (such as phasing out fossil fuels, sustainable transport and ending deforestation).
Second, COP29 should clearly signal to governments that the next round of contributions needs the just transition at their heart. At the end of 2023, only 31% of NDCs referenced the just transition to varying degrees. The deadline for the updated NDCs is February 2025, and COP29 could show what ambitious and effective just transition policy looks like, with clear fiscal policies to support industrial, regional and labour market policies, including skills development and social protection, as well as rules and incentives to mobilise private capital. The NDCs need to be supplemented by comprehensive national transition plans with justice considerations integrated throughout, which could be the basis for issuing sovereign bonds.
Third, COP29 needs to boost mainstreaming the just transition into the routine practices of business and finance institutions. Supporting the transition is necessary to build public trust and develop the human and social capital needed for a successful shift to a net zero and resilient economy.
From fragmentation to cooperation
One way to do this is to integrate the social dimension into the climate transition plans that companies and financial institutions are both voluntarily and increasingly required to produce. In the United Kingdom and the European Union, the publication of climate transition plans is becoming mandatory. As part of the UK’s Transition Plan Taskforce, advice was produced on how to embed just transition principles across the five pillars of a good climate plan: foundations, implementation, engagement (with value chains, government and stakeholders), as well as metrics and governance. The G20’s Sustainable Finance Working Group is also pooling best practices on how to move ahead with “credible, robust and just transition plans”, which COP29 could support and bring to universal attention. These plans can be the basis for raising capital to implement the just transition, for example, through sustainability-linked bonds and loans. Market rules for the broader arena of transition finance must also incorporate the implications for people as workers, communities, suppliers and consumers.
At this time of global fragmentation, getting global cooperation on financing the just transition could be viewed as a hopeless quest. But another way of looking at this would be to view financing the just transition as the glue needed to put climate action in the service of burning social needs.
