How to achieve a ‘just transition’ to net zero?

There is no doubt that the world needs to move away from its reliance on fossil fuels if the target of net zero CO2 emissions is going to be reached by 2050 and the climate crisis contained to a level as close to 1.5 degrees as possible.

Whatever your view of climate change, there is a very strong economic argument for achieving net zero compared with the cost of dealing with its unchecked effects on the planet.

According to a report released earlier this year by Deloitte, if the world acts now to achieve net zero emissions by the middle of this century, the transformation of the economy would set the world up for stronger economic growth by 2070.

Such a transformation could increase the size of the global economy by $43 trillion in net present value terms from 2021- 2070¹.

This is far from being an isolated assessment. The World Economic Forum estimates 10.3m jobs in clean energy will be created by 2030, far outstripping the 2.7m that will be lost from the fossil fuel sectors.

With the exception of a small minority of climate change deniers, most of us accept that fundamental change is required, but where to start? Establishing the mechanisms and the funding required for achieving net zero will mean a complete rewiring of the global energy system, driving disruptive development and affecting almost every sector.

This is about much more than taking a leap of faith. It’s going to take careful planning for the next few decades including the creation of a consistent framework across key criteria in Environmental, Social and Governance domains while accepting that some of the technologies required for a smooth and just transition aren’t yet widely used or available.

So, what do we mean by a ‘just transition’? According to the International Labour Organisation, it means “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind”. We cannot get to net zero without both collaboration and innovation to bring everyone along with us. This stretches from emerging markets, to disadvantaged social groups and supporting brown sectors in becoming green.

This shift presents an enormous financing opportunity – estimated anywhere between $125-$350 trillion, but with this promise of opportunity comes risk. Key to realising this opportunity, while supporting a measured and just transition, will require careful balancing.

With transition finance, two key criterion are i) whether the finance is used to invest in or insure activities that are “green” or ”going greener,” and ii) whether it is required to support social or economic objectives.

Critical to achieving a just transition is to ensure that sufficient protections are put in place against the risk of greenwashing, especially for transition finance. This scope is wider today than it will be in a future world in which key transition technologies is more advanced, and dependency on fossil fuels in developing markets is reduced. It’s a massive undertaking that needs buy-in from governments, companies, financial services providers and individuals.

Although on the face of it, the just transition to net zero feels like an almost insurmountably difficult task, Baringa the authors of a new report commissioned by Guernsey Finance say ‘just start somewhere’.

Titled Guernsey and the Just Transition, the report lays out a roadmap for each of the specialist sectors that operate in Guernsey to embark upon.

Good governance is essential in order to keep driving change and this presents a real opportunity for an international finance centre such as Guernsey, which has five decades of experience in investment funds, insurance, private wealth and banking, not to mention excellent governance.

Baringa warns this will require new ways of thinking about risk. It will require investment in the workforce and upskilling employees as well as knowledge sharing and collaboration so key skills are shared among the wider industry and new solutions can be developed.

The report outlines the challenges as well as the opportunities – this is more than simply building windfarms. We cannot just turn off the oil and gas taps overnight. Vast amounts of capital will need to be channeled to the right places and we need to be mindful that the starting line for those in the developed world is in a very different position from countries that don’t have the luxury of smoothly shifting to renewable energy sources. That’s not going to move the needle.

One thing is absolutely clear: no action is not an option. The world is moving towards ESG and net zero. International finance centres such as Guernsey need to act now if they are to remain relevant on the global stage. Fortunately, the island has a long track record of excellent governance and innovation and the ecosystem already exists for the jurisdiction to remain a force for global good, and is already looking at the risks and opportunities in managing this transition effectively.