A global rush to go green will hurt some countries, communities and individuals more than others. The potential negative impact is stirring conversation about better ways to manage the decarbonisation of economies.
Shutting all coal mines in South-east Asia economies, where “coal is still king”, could in the short term depress wages by billions of dollars, according to estimates by the International Labour Organization (ILO).
These are some examples of how parties could be adversely affected by responses towards climate change.
Few today would question the urgency of taking climate action, but the harder nut to crack is how to make the transition an inclusive one for vulnerable countries and communities.
The problem is often referred to as the “just transition”, from a principle in the 2015 Paris Agreement. In it, signatories promise to account for “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities”.
ILO adopts a broader definition of a just and inclusive transition, as “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”, The Business Times reported.
A particular challenge for emerging markets
This just transition is of particular importance to emerging markets. These countries have contributed less to the cumulative greenhouse gas (GHG) emissions present in our atmosphere today, but are typically most vulnerable to the physical impacts of climate change.
They also tend to be more dependent on fossil fuels for ongoing development.
In South-east Asia, for example, total energy supply expanded by about 80 per cent between 2000 and 2020. Fossil fuels made up about 90 per cent of the growth in energy demand, according to a report from the International Energy Agency (IEA) published in May this year.
Coal-powered energy alone expanded by a factor of six. Coal accounted for over 40 per cent of the region’s power generation mix in 2020.
Emerging markets have fewer resources to fund the transition to a low-carbon economy and manage the physical impact of climate change, and have the largest un-financed basic development needs.
Emerging markets, excepting China, comprise two-thirds of the global population, but hold only 10 per cent of financial wealth, according to another IEA report dated June 2021. The report also noted that emerging markets have accounted for just 10 per cent of the global issuance of sustainable debt, of which 53 per cent was issued by corporates.
Managing the transition on the ground
Efforts to facilitate a just and inclusive transition should centre on reskilling and relief for displaced workers, conversations with local stakeholders as well as lobbying for inclusive policies, said activists and academics. In all this, regional and local governments, corporates and financing institutions play key roles.
“There is no easy answer, from a policy perspective. If you want to decarbonise, there is going to be disruption. But if we don’t go through the transition, the social impact of rising sea levels and temperature would also be very, very negative,” said Mervyn Tang, Schroders’ head of sustainability strategy for Asia-Pacific. “The just transition is about managing the impact for subgroups, as opposed to managing the trade-off between environmental and social,” he said.
This is because decarbonisation transitions may create new opportunities for some, while disadvantaging others.
Kiriya Kulkolkarn, an associate professor at Thailand’s Thammasat University who studies Thailand’s transition to electric vehicles, noted that while the transition will create new businesses and jobs in the renewables sector, its net effect on the labour market is unclear.
“If workers are forced to move to another industry, they will not be able to instantly compete because they will need time to adjust,” she said.
Kulkolkarn suggested government-level work groups be set up to assess the impact of any transition. Employers can then kick off the reskilling process by working with labour unions on skill development programmes.
The design of climate action policies must also involve communities, workers and consumers who are most affected.
Some have argued that this may lead to a drag on climate action policies or provide an excuse for reducing climate ambition. But without buy-in from workers and communities affected by transition strategies, especially vulnerable ones, experts say the political impetus to bring about climate action is likely to falter.
In India, an initiative is underway to convince the Gujarat state government to extend subsidies for solar rooftops to slum dwellers.
Siraz Hirani, programme management specialist at non-profit Mahila Housing Trust, which is leading this initiative, said government subsidies are currently available only to those who can provide legal ownership of the premises they reside in.
This is an example of how the low-income, including households and small and medium-sized businesses, are sometimes priced out of transition initiatives.
Hirani also highlighted the importance of raising awareness among local communities on the importance of climate action, but stressed that this should be done in a way they can understand.
“Much of climate education today involves too much jargon. Literacy levels among the urban poor are not high, and they may not have access to sophisticated media platforms. Communicating face-to-face may be ideal for these stakeholders,” he said.
Climate action, if managed well, should put an end to long-drawn social problems, Hirani pointed out. In the case of slum dwellers, whose lives and livelihoods are often most vulnerable to climate disasters, a proper transition could translate into proper housing and more climate-resilient living environments.
Transition finance
Financial support is crucial for facilitating a just transition, but the type of finance on offer can prove a barrier.
BlackRock estimates that emerging markets need at least US$1 trillion per year to achieve net-zero emissions by 2050, but notes that the figure would be “significantly higher” if the costs of adaptation are taken into account.
Financing therefore needs to be more nuanced. Many asset owners are incentivised to pull assets out of carbon-intensive countries or companies to meet net-zero targets, said Prudential’s head of responsible investment Liza Jansen.
The better approach is to actively invest in the transition of carbon-intensive companies and engage in the greening of their business models, she said, even if this means that the investor’s carbon footprint may go up in the short term.
“The easiest way to decarbonise your investment portfolio and get a higher ESG (environmental, social and governance) rating is by shifting assets from emerging markets to developed markets. That way, you get a more sustainable portfolio on paper. But we don’t think this is helping the transition. We need to address this,” she said.
Christa Clapp, co-founder and managing partner of Cicero Shades of Green, a subsidiary of climate research institute Cicero, said the engagement of “traditional brown industries” is crucial to the just transition.
“If sustainable finance is limited to pure play green actors, we are not encouraging an economy-wide transition that is necessary to achieve the climate targets set out in the Paris Agreement,” she said.
The global shift to electric vehicles could cut hundreds and thousands of automotive jobs.
In some parts of India, slum dwellers struggle to adopt solar energy because subsidies are only available to legal homeowners.
Such considerations are reflected in the net-zero road maps set out by local banks DBS and UOB.
DBS opted for intensity reduction over absolute reduction in setting sectoral-specific emission reduction targets (except in oil and gas), as it acknowledged that sustainable and inclusive growth will require greater output and activity.
“We don’t want to de-grow our economy because climate is one very important sustainability challenge, but it’s not the only one. In a net-zero world, you need less fossil fuels, that’s very simple. But for the others, what we also want to accommodate is really inclusive growth, which is needed for many things, among others, social equity,” said the bank’s chief sustainability officer Helge Muenkel.
UOB was the second bank in Singapore to announce sectoral specific net-zero targets by 2050. These goals were set to “(advance) sustainable socio-economic development in tandem with decarbonisation in South-east Asia”, the bank said.
Prudential’s Jansen also sees an opportunity for multilateral financing institutions to help raise more funds, by originating loans and getting institutional investors to invest in a pool of assets. This is a departure from the current loan-and-hold approach many multilateral financing institutions adopt, she said, but would free up capital to make more loans.
Meanwhile, financial institutions have an active role to play in encouraging companies to pay more attention to social indicators, said Victoria Delmon, the International Finance Corporation’s (IFC) regional upstream lead for infrastructure in Asia-Pacific.
Sustainability-linked financing, in particular, can create this momentum.
This year, IFC signed a US$100 million 10-year sustainability-linked loan agreement with global mining company Anglo American. The goals tied to the agreement are aimed at improving education quality for more than 73,000 students and promoting job creation in rural communities close to the miner’s operations across South Africa. This is IFC’s first loan in the mining sector focusing exclusively on social development indicators.
IFC is currently supporting port operators in the greening of port operations in India, and has encouraged them to look at social and governance issues such as increasing parity in the sector’s workforce, in addition to GHG targets, Delmon said.
Kulkolkarn of Thammasat University said sustainability-linked financing is particularly beneficial as it incorporates specific targets that have to be met at certain time intervals as well as penalties in the event that those targets are not achieved. “Monitoring is a crucial piece of the work. You can’t just have an idea, put down on paper in the loan agreements, and not follow up,” she said.
Finally, forms of financing may need to change too.
Oxfam Pilipinas’ advocacy officer Joel Pagulayan suggested climate finance providers commit to disbursing more grants. While overall climate finance to Asia has seen growth in recent years, much of that comes in the form of debt-driven finance.
“The use of debt-based financing instruments may drive these emerging economies, many already in financial difficulties, into further debt in the future,” Pagulayan said.
The challenges of climate change, poverty and inequality should be addressed simultaneously, activists said, as focusing on just one could mean posing a risk to the other in the long term.
