A recognition of the threats posed by climate change is driving a transition to a low-carbon economy. Support for the Paris Agreement and UN Sustainable Development Goals demonstrates this shift in awareness. Many countries, sectors and companies are relying less on fossil fuels and developing cleaner, renewable energy sources.
Every industry requires energy, which means that moving from fossil fuels to low-carbon alternatives will have a significant global impact. Environmental and social issues are inextricably linked, though. If left unabated, climate change will have a tangible, negative effect on human lives. Climate change is a human rights issue as well as an environmental one.
To minimise risks and maximise opportunities, investors should encourage a ‘just transition’. This aims to ensure that everyone shares in the benefits of transitioning to a low-carbon world, including workers, communities and consumers. It means combining urgent action to address climate change with a continued focus on decent work, reducing inequality and upholding human rights. We outline some key areas for investors to consider below.
Vulnerable workers
One of the main concerns of moving to a low-carbon economy is the effect it will have on workers. As energy sources change, some jobs will become obsolete and others will be created. The shift to cleaner energy sources will create jobs in areas like infrastructure and transport. But workers in high-carbon industries need support to retrain or relocate into new areas.
If we leave workers behind, the economic and social effects could be significant. These effects can include higher unemployment, greater welfare demands and poor health. However, history has shown that it is possible to achieve a successful, inclusive transition. Ruhr in Germany, for example, used to be reliant on the coal industry. It has since restructured into a key centre for environmental industry, technology and research.
Supply chain workers may also face additional pressures in the wake of the transition. For example, a significant amount of the world’s cobalt is sourced from the Democratic Republic of Congo. But there have been longstanding concerns over child labour and human rights in this country. Cobalt is a critical component of batteries, which are essential for electronic vehicles. There is a risk that abuses in the cobalt supply chain may increase as the demand for cobalt rises. However, there is also an opportunity to draw on this increased demand to raise standards and create more stable, sustainable supply chains.
Land rights and community consent
Over the years, the extractive industry has developed a poor reputation for exploiting the communities in which it operates. This can drive conflict among communities and result in project delays, shut-downs and business losses. As renewable operations move into this space – using land to build wind farms or hydroplants, for example – it is important to ensure that respect for human rights is prioritised. Operators must use proper methods to obtain land rights and community consent.
The enthusiasm for improving environmental standards may tempt companies and governments to overlook human rights considerations. This could leave the renewables sector with the same operational and reputational costs experienced historically by extractives. Alternatively, renewables industries can learn from the challenges faced in the past and the ways in which others have successfully navigated community relations. This would enable them to implement best practices and capitalise on commercial opportunities.
Access to energy
Responding to climate change requires a global transition to low-carbon energy sources. But we also need to recognise that countries and regions will move at different paces, and seek different kinds of low-carbon solutions. These differences can stem from a variety of sources, including infrastructure challenges, a lack of suitable conditions for renewables, or cost pressures.
The consumer is a critical stakeholder in the transition to a low-carbon economy. Maintaining access to energy should be a priority, not only through infrastructure and network facilitation, but also through fair, affordable pricing strategies. For energy companies, this has a direct effect on their commercial strategy and financial viability.
Food security
There is a close link between the food and energy sectors. Food production and distribution account for around 30% of the world’s energy consumption. Mechanisation and industrialisation in the food industry have increased energy usage, but also significantly improved yields and distribution capabilities. Shifting to renewable energy sources for food production could provide significant opportunities. These include lower carbon emissions and operating costs, and decoupling food prices from oil prices.
The transition to a low-carbon economy is essential to the long-term future of the environment and society. The human effects of a transition could be substantial. Investors should try to influence and invest in companies that promote a ‘just transition’. This could improve long-term risk-return profiles, while also securing a more sustainable, inclusive future for us all.
Elizabeth Meyer is a senior ESG investment analyst at Aberdeen Standard Investments
