Asset owners flag social risks in route to 'just transition'

Zero carbon commitments of advanced economy investors can destabilise emerging markets if the social risks are ignored.
Asset owners flag social risks in route to 'just transition'

The proposition of a ‘just transition’ was a highlight in discussions at the recent COP27 climate change conference held in Egypt last month. Many of the key topics shifted from the previous COP’s environmental promises of developed nations to focus on the failure of the financial world in providing enough money to help emerging economies effectively cut their carbon emissions.

“A ‘just transition’ very much means considering the social and economic dynamics which are inherent in the global transition towards a net-zero economy and society, which is less reliant on fossil fuels and carbon. It's also acknowledging that certain hard to abate sectors will take longer to achieve this transition than others,” Rodney Gollo, head of risk at insurer Bupa Asia Limited told AsianInvestor.

“To date, most conversations with regards to climate change and sustainability have tended to focus a lot on the environmental component, and that's where all of the momentum and the regulatory attention and focus has been,” he said.

Rodney Gollo,
Bupa Asia Limited

While Gollo thinks the environmental focus is very important, he argues there needs to be a more considered approach in emerging and less developed countries.

"It takes time to diversify and change a country’s energy mix, therefore it’s not as easy for people and businesses in emerging economies to immediately move away from using fossil fuels, particularly when most of the developed world’s growth and industrialisation has been predicated on leveraging these resources for decades," said Gollo.

“A transition to a net-zero economy is far more difficult for emerging markets because they usually have more exposure to social risks, weaker governance and lower financial buffers than developed economies.”


Gollo highlighted a promising development launched on November 15, the Just Energy Transition Partnership in Indonesia, which is a $20 billion financial package — backed by the United States, Japan and other world powers — designed to support the country’s efforts to phase down coal and remove barriers to investing in clean energy.

As the world’s largest thermal coal exporter, Indonesia is highly exposed to climate transition risks due to the domestic economy’s reliance on the export and the jobs the industry creates for a large part of the country’s population, said Gollo.

“Part of transition finance is about capacity building, and helping to reskill this large population of people, who for the most part, work in these industries and live in areas where they are large employers,” he said. “It’s not as straightforward as turning to country’s like Indonesia and asking them to shut down these coal fired power plants — without simultaneously addressing the social and economic factors - otherwise what would these people do then?”

Luba Nikulina, chief strategy officer at IFM investors, concurs that a large element of the just transition essentially boils down to the “labour rights” of workers as economies transition into low carbon states.

Luba Nikulina,
IFM Investors

“Obviously, lots of sectors are going to be affected in the transition to net zero and people will lose jobs in those sectors. The ability to secure their rights and create alternative job opportunities is very important,” Nikulina told AsianInvestor.

Creating social security for workers in transitioning economies should also rightly be a concern of investors and private finance, she said.

“There’s a systemic risk for long term investors, like climate risks if social risks are not managed it essentially impacts the whole system. If the transition out of a carbon economy is not ‘just’—if it’s not managed, this can lead to social unrest, political disturbances, which mean that the system gets destabilised, and it will have an impact on financial returns,” said Nikulina.

“A just transition will mean that you don't have a single decision of closing carbon intensive businesses. You have to think about the systemic impacts. You look to create alternative opportunities for people; invest in their training and invest in businesses that will provide employment,” she added.


Claudia Wong, Asia investments associate at insurance advisory firm WTW, cited risk management, opportunity identification, and collective actions as necessary means to facilitate a just transition to net-zero greenhouse gas emissions – one of the main takeaways reinforced by COP27.

Claudia Wong,

At the conference, rich governments and nations for the first time agreed to set up a fund to provide pay-outs to developing countries that suffer "loss and damage" from climate-driven storms, floods, droughts and wildfires.

“The establishment of a loss and damage fund has been long needed, as we know that certain amounts of loss and damage have already occurred, given existing global warming of 1.1°C,” said Wong.

Wong said the proposed adaptation finance will help alleviate some of the losses and damages associated with climate change. Historically, however, adaptation finance has been short-changed, and investors must step up their game when it comes to providing finance to areas such as building more resilient housing and infrastructure, or funding sustainable agri-tech, Wong said.

“That is still not enough, however, as losses and damages, both past and future, are disproportionately concentrated in developing countries. While this reinforces the need for a speedy transition, it must also be recognised that the climate transition is more nuanced for the most vulnerable countries and cannot come at a cost of significant economic damage,” she said.

Investors in developed countries should have a moral imperative to provide more transition financing to developing nations, according to Wong.

“Such financing must be innovative, for example using blended finance via public-private partnerships, and consider the unique socioeconomic circumstances of individual countries,” she said. 

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