Financing a Just Transition

It’s important that communities impacted by climate change and the emergence of new economic models are supported, and that gains from new technologies are distributed fairly. But deciding how to fund a Just Transition is imperative.

“Finance will be the enabler of a Just Transition, and it will have to come from a variety of public and private sources,” says Ingrid Holmes, Executive Director of the Green Finance Institute (GFI).

“We are already starting to see some interesting innovations but a Just Transition will require smarter use of government money, clever use of incentives and a whole suite of new products from banks and other providers that enable people to be part of the green transition.”

Complementary finance models

Financing a Just Transition will take many forms – from the macro to the micro.

The ability of governments to borrow at low cost and over the very long-term means public finance will play a crucial role in funding a fair transition for workers, communities and consumers.

Government is also well placed to make policy interventions that mitigate the negative repercussions arising for those with the least resources from measures designed to manage climate change.

“The creation of an ultra-low emission zone in Greater London is fantastic for health and reducing carbon emissions, for instance,” says Holmes. “But electric vehicles are unaffordable for many.*”

However, public finance can’t do it all and needs support from complementary initiatives. “We work with a philanthropist that has backed a 0% EV charging loan accessible to lower income households to make this critical infrastructure available to people who don’t have the funds or the credit record to borrow conventionally,” says Holmes.

Moreover, the power of locally-sourced finance should not be overlooked, says Bruce Davis, Co-founder of Abundance Investment, an online platform offering environmentally and socially beneficial investments. “It’s essential to create positive stories – and investment is a great way to do that,” he notes.

“For instance, up to 10% of the funding of Bristol’s £1 billion City Leap energy project will come from the community,” explains Davis. “That involvement creates transparency about how the project is financed and who benefits. But it also generates stories that replace myths about gas boilers or radiators and connects with people on an emotional level, which is often more important than a rational pounds-and-pence argument.”

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Wates Group, one of the UK’s largest family-owned built environment, residential development and property services companies, recently secured a £90m sustainability-linked loan from a three-bank syndicate led by Lloyds Bank. As the sole ESG Coordinator, Lloyds Bank worked with Wates to set three ambitious KPIs to achieve margin discounts on its funding. The second of which is to create nearly £370m of social value over the next three years. To achieve this objective, Wates will create jobs, support growth and promote healthier lifestyles in the communities it operates in.

Investing in a Just Transition

Institutional investors and financial markets have vast resources to put to work, and many have already embraced the net-zero transition. “It’s now part of the financial mainstream,” says David Hickey, UK Head of Sustainability at BlackRock. “To quote my CEO Larry Fink, it’s the greatest investment opportunity of our lifetimes given the scale of change – and capital – required: he believes that the next 1,000 unicorns will be transition companies.”

But for the net-zero transition to work, it must go hand-in-hand with a Just Transition in order to get buy-in from society, according to Hickey. As financial markets redirect capital towards net-zero projects, banks and investors must anchor their net-zero plans in Just Transition principles, respecting social, labour and human rights standards, creating new, high-quality jobs, rejuvenating communities and working within planetary boundaries.

For many people, that might sound easier said than done. “There is a narrative in parts of the sustainability community that financial markets are inevitably in conflict with local communities,” notes Davis. “But in reality, finance bridges markets to communities and place. The ability to look further afield for capital means that communities without resources are still able to make important investments, such as in community energy, using tools like our Community Municipal Investments.”

As well as enabling projects that otherwise couldn’t reach fruition, finance is also essential to bridge the gap between the investments into a Just Transition and the benefits. Whilst the social and wellbeing benefits can manifest immediately, recouping the financial costs can take several years or even decades to accrue.

“Retrofitting social housing, for example, will address problems of condensation and mould, which cause poor health, as well as aiding the UK’s decarbonisation efforts,” explains Miles Lewis, Director of Sustainability at Clarion Housing Group. Better windows and insulation will also significantly lower costs but recouping those savings will take time. “The key objective is to get communities on board and clearly demonstrate the benefits of action and then ensure the financing is in place,” adds Lewis.

Evolution or reinvention?

One important aspect of the Just Transition finance debate is whether Just Transition principles can be layered on top of existing sustainable finance instruments, such as green bonds and sustainability-linked loans, or whether new products should be created, notes Chinyelu Oranefo, Director, Sustainability & ESG Finance at Lloyds Bank. “The sustainable finance market is now well established so there’s a strong argument in favour of keeping and improving what we have rather than seeking to create another new product” she adds.

“Rewilding and carbon sequestration through tree planting is clearly desirable, but if it isn’t handled well, it could result in a mass clearance of tenant farmers. There need to be checks and balances around how capital is provided to these projects to ensure community engagement,” says Holmes at the GFI. “Scotland has already wrestled with these issues in the Highlands where mass tree planting has prompted the introduction of principles for responsible investment in natural capital.”

Abundance Investments’ Davis agrees that there is no need to reinvent the wheel. “The Community Municipal Investments that we developed, which are issued by a council directly to the public, were actually invented in 1878 and were then distributed through that well-known peer-to-peer platform called the Post Office. Finance has a really long history, but quite a short memory. We need to focus on outcomes rather than innovating for the sake of it. Where we do innovate, it should be in support of increasing agency and participation.”

While innovation for its own sake might be undesirable, some creative thinking is required, especially when it comes to products targeting consumers. “If we accept that there are Just Transition goals that today’s market won’t support on their own, then we need to find mechanisms to ensure they are supported,” says Holmes. “For instance, we are working on the deployment of utilisation-linked finance, where a bank would provide capital for EV charging infrastructure but only require payment based on actual use. It would facilitate investment ahead of demand to try to create a more inclusive infrastructure,” she explains.

Similar innovation is required in the housing market. “Green mortgages, with the finance linked to the home rather than the individual, could play an important role in retrofitting the UK’s housing infrastructure,” says Holmes. “We also need to see more innovation in the use of public finance so that the UK Infrastructure Bank, for example, might provide a first loss guarantee to enable the rollout of property-linked finance to people with a range of income levels.”

Grounds for optimism

While the incorporation of Just Transition principles into government and financial institutions’ net-zero plans and the development of community-based investment schemes is still in its infancy, Hickey at BlackRock believes there is grounds for optimism.

“Clearly, there are challenges,” he says. “For institutional investors, a project has to have a competitive risk/return profile because they have a fiduciary responsibility,” says Hickey. “That won’t always be the case with projects that prioritise Just Transition goals. But that’s where philanthropists, retail investors or government support can play a role.”

More generally, it’s important to remember that investing is essentially an act of hope, according to Hickey. “People invest because they want to have a better future,” he says. “We need to tap into that feeling to finance a Just Transition, because a Just Transition is in effect a belief that we can build a brighter tomorrow.”

Key messages

• Government, investors, banks and communities will need to play complementary roles in financing a Just Transition.
• All net-zero plans should incorporate Just Transition principles, such as helping to retrain work forces, understanding and mitigating the negative impacts of those plans on communities and nature.
• Innovative models and tools already exist to support Just Transition such as utilisation-linked loans or green mortgages, with finance linked to a property rather than an individual, could be valuable.

This article, and quotes within, are based on discussions at the Lloyds Bank Just Transition Conference held on 15 June. The views expressed are those of the speakers and do not necessarily reflect the views of Lloyds Bank.

*This panel took place prior to the ULEZ by-election discussions

Lloyds Bank actively seeks out opportunities to support their corporate and institutional clients to finance, and deliver a JUST net-zero transition, benefitting companies, communities, and the wider economy. Find out more here.