How does climate finance integrate the “just transition”?
As part of their climate finance mandates, Development Finance Institutions (DFIs), Multilateral Development Banks (MDBs) and impact investors primarily focus on projects related to the energy transition – in particular divestment coal and the adoption of renewable energies. But with the growing empowerment of civil societies and activist groups, development financiers are now taking into account the impact of this transition on the economy and local communities in emerging markets and low-income countries. Initiatives under the “just transition” agenda – a term that has been widely interpreted as the social impact of the energy transition, particularly in emerging markets – are no longer driven solely by philanthropic grants, but are embedded in energy transition funds and renewable energy projects, particularly in emerging markets.
Mainstreaming just transition into climate action aims to ensure that the benefits of a low-carbon and climate-resilient future are shared by all. As a result, MDBs and DFIs are increasingly incorporating a comprehensive just transition analysis into the decision-making process for climate action-related projects.
Among the most notable agreements under the just transition agenda is South Africa’s Just Energy Transition Partnership (JETP), which was announced at COP26 last year. Under the plan, South Africa will receive $8.5 billion – through various mechanisms including grants, concessional loans and investment and risk-sharing instruments, including to mobilize the sector private sector – from the United States, Germany, France, United Kingdom and the EU to support its transition from coal-fired power plants to cleaner energy sources.
South Africa employed more than 90,000 people in coal mines alone in 2020. The partnership recognizes that climate ambitions will affect mining communities and workers. It stresses the need for a “just transition”, which supports affected workers and vulnerable communities, especially coal miners, women and young people, as South Africa’s economy evolves. Subsequently, it will focus on identifying financing options for innovative technical developments and investments, including electric vehicles and green hydrogen, to help create quality green jobs.
The EU Just Transition Mechanism is a framework to support national just transition efforts, providing dedicated financial resources and technical assistance to EU Member States with the requirement that beneficiaries develop national plans just transition. It includes a €17.5 billion ($17.8 billion) Just Transition Fund, as well as €13.3 billion in grants and loans through other channels to support programs and just transition investments, in addition to co-financing and matching requirements for countries.
Combine the SDGs
Although there is no widely accepted definition of “just transition”, DFIs and MDBs are developing their own mandates and measures to invest at the intersection of climate and social impact. “The way FMO sees the just transition is that by taking climate action aligned with SDG13, we also seek to have a positive impact on jobs and sustainable economic growth (SDG8) and on reducing inequalities (SDG10),” says Jorim Schraven, Head of Impact and ESG at FMO.
“As a start, a just transition requires fulfilling the commitment made under the Paris Agreement to provide at least $100 billion a year to developing countries. FMO contributes to this through its green finance activities and the mobilization of private investments. A second element of a just transition is the equitable allocation of the remaining global carbon budget of just over 300 gigatonnes, until we exceed the 1.5 degree trajectory. Historically, FMO has worked with non-OECD IPCC scenarios. Third, it is important to finance not only climate change mitigation, but also adaptation and resilience, because the needs in this area are great in developing countries.
The Dutch Climate and Development Fund is a fund that FMO has launched to contribute to a just transition. It is mobilizing €160 million from the Dutch government to mobilize private investors and is working with climate fund managers, the Dutch development organization SNV and the World Wide Fund for Nature (WWF) to find projects with a landscape approach. “This strategy enables the consortium parties to actively seek and develop private sector investment opportunities for other consortium parties in and around, near and downstream of their own investment activities, and contributes to the climate adaptation and resilience,” adds Schraven.
For the Asian Development Bank (AfDB), just transition is a key corporate agenda. “We are stepping up our operations in this area and developing our whole-institution approach,” says Kate Hughes, Senior Climate Change Specialist, Department of Sustainability and Climate Change, ADB. According to Hughes, just transition is still a relatively new concept for development banks. Although much of the activities under just transition are those that the MDBs are already carrying out, the effort has been to reorient existing operations to align them with the transition agenda. “For example, in countries that have a strong need for energy transition, they are looking for opportunities to direct social sector lending to align with that transition agenda,” adds Hughes.
AfDB is pushing the boundaries of “just transition” by going beyond the energy sector and including non-energy sectors – including transport, waste, forestry, agriculture, fisheries and tourism – which are responsible for more than 40% of greenhouse gas (GHG) emissions. “A lot of people think of just transition as a kind of harm minimization approach,” says Hughes. “Which is certainly a key part of it – being proactive in understanding, anticipating potential impacts and ensuring you have appropriate mitigation measures in place. But we also see just transition as a positive agenda. We have started to engage with our developing member countries on this, in terms of the opportunities that can arise from strong just transition actions, which can include economic diversification, requalification of industries, new opportunities to attract the private sector in certain regions, sectors or areas.” According to Hughes, many of the potential barriers that prevent countries from increasing their climate ambition involve economic and social barriers.
Emerging Markets Opportunities
While just transition funding in the EU has focused on coal-related projects – such as the 2020 EBRD loan of €30.8 million to the town of Wałbrzych in Poland, a former coal mining centre, to bring about a significant improvement in the energy efficiency of the local building stock and modernize the city – DFIs and MDBs are now turning to emerging economies for just transition financing.
To better understand the role of a just transition and its ability to address climate change in the African context, the African Development Bank (AfDB), with the financial and technical support of the CIF, launched a just transition initiative in December 2021. As part of this initiative, they plan to consult with African stakeholders to build consensus around a working definition of a just transition and identify the impacts of the energy transition led by developed economies. on a low-carbon and climate-resilient economy in Africa and explore potential policies and strategies.
Impact investors are also helping build momentum for a just transition in emerging markets, particularly in SDG 5 (gender equality). “The key idea is that people living in emerging countries are not only beneficiaries of the transition, but also actors who play a leading role in it,” says Maria Teresa Zappia, Director of Impact and blended finance, Deputy CEO of BlueOrchard, a global impact company. investment manager. “For BlueOrchard, this has translated into investments to provide smallholder farmers with access to climate insurance products tailored to the crops in the region or to support medium-sized green infrastructure projects that can guarantee the access to clean energy for all.
The just transition is increasingly playing a decisive role in the divestment of fossil fuels in emerging markets. For example, the UN-led Net Zero Banking Alliance says its conservative approach to fossil fuel divestment is due to its belief that a just transition – which guarantees job opportunities and protects vulnerable communities – must be achieved in parallel with decarbonisation objectives. “Given the global market‘s dependence on fossil fuels, rapid divestment can lead to extreme market shocks that could have a profound impact on the world’s most vulnerable people and undermine a just transition. Instead, the Alliance chooses to partner with GFANZ in developing guidance for responsible retirement of these assets and seeks support from government and wider society to accelerate the readiness and scalability of new technologies and protect the interests of vulnerable communities,” the NZBA said in a statement. April.
As just transition gains momentum among development banks, there has also been a shift among government stakeholders with whom DFIs engage. “Traditionally, climate policy was the responsibility of the Ministry of the Environment. Then there was a shift to the Department of Finance acknowledging that this is a budget and an economic issue. But now it involves ministries of education, ministries of labour, ministries of gender, other social ministries. Aligning their work and bringing these cross-departmental dialogues together is essential for a just transition, because the driving force will come from the environment or finance ministry, but the actual programs and support that need to be rolled out come from other ministries,” says Hughes. The involvement of various ministries with different budgets and agendas also presents unique and complex policy challenges for DFIs and MDBs, particularly in emerging markets.