The purpose of the investment industry should be to create sustainable wealth for investors through stewardship. Such an approach strives to provide the end beneficiaries – the investors and pensioners who make up a good proportion of society – with income they can afford to spend, in an environment and society that they want to live in. As an investment manager our decisions will have impacts on the world in which our beneficiaries live and work today as well as the one into which they will retire tomorrow. Therefore we – as fiduciaries entrusted with the savings of millions of individuals – take our ownership responsibilities seriously. Thus, we engage globally with policymakers and investees on a broad range of environmental and societal issues, many of which – including biodiversity loss and the COVID-19 pandemic – cannot be tackled if each country acts alone.

Before the COVID-19 pandemic, investors and consumers alike were already becoming increasingly focused on the threat of climate change. The IPCC’s 2018 special report made clear that the impacts and risks of overshooting 1.5°C global temperature increase are more severe than previously understood, and that to avoid a 1.5°C overshoot, global net anthropogenic CO2 emissions must decline by around 45% from 2010 levels by 2030, reaching net zero around 2050.¹ Yet data from the World Meteorological Organisation showed that greenhouse gases (GHGs) in the atmosphere rose to record levels last year and that levels of carbon dioxide were 18% higher from 2015-2019 than in the previous five years.² Scientists warn that we are already seeing the effects of climate change, from longer and more intense heatwaves to rising sea levels. But by the time we see the full implications it will be too late to avert them. Avoiding the worst impacts of climate change requires policymakers to consider the longer-term horizon, which for many states is beyond the term of a single government.

There is a social aspect, too, in the fight against climate change. States from across the world ratified the Paris Agreement, with its statement that governments should take into account ‘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’.³ This aim was reiterated in more detail in the COP24 Solidarity and Just Transition Silesia Declaration in 2018, signed by over 50 countries including the UK. It is a concept that has been taken up by many investors and campaigners, who recognise that it is crucial to ensure that the impacts of the transition are not unfairly felt by certain groups in society.

When 2020 came around it brought with it the COVID-19 pandemic, an unprecedented crisis in our lifetimes that has had a devastating impact on economies and societies across the world. The pandemic has thrown into sharp relief the inequalities that many investors and campaigners were already concerned about. Some communities have experienced far worse health and economic outcomes than others. This is a complex issue influenced by a range of factors, from exposure to air pollution to overcrowding, from job security to health care access, and the impacts will be felt in years to come. At the very least, some jobs may not return after the pandemic, especially if employers consider it cheaper to automate. Similarly, unless we collectively act, we expect climate change to have a significant real economy impact just an order of magnitude larger and felt for decades if not centuries.

Yet in these tragic circumstances, there is hope. When the coronavirus aggressively spread across the world this year killing hundreds of thousands, governments opened the fiscal floodgates and there was an unprecedented change in societal activity. We have an opportunity to make a virtue out of a necessity. Policymakers must ask themselves when considering long-term recovery how to ensure the measures taken to get the economy and society back on their feet are linked with advancing climate goals. They must not come at the expense of climate change mitigation or worsen the inequalities that have been so clearly exposed. We have seen during the pandemic that some groups are worse affected by such global crises, and these same groups are likely to be hit the hardest by climate change or, if efforts are not made to ensure a just transition, by the road to reach net zero. Industry and investors have their role to play. We also need governments and policymakers to significantly ramp up global policy ambition.

So, what does this mean in practice? Climate goals should be a key consideration for all areas of fiscal policymaking, especially when it relates to infrastructure funding decisions. Right now, crucially, climate- friendly conditions should be attached to fiscal sponsorship, subsidies and bailouts. Whilst there may be urgent short-term economic lifelines required to protect productive corporate activity and jobs, wherever possible climate goals should be incorporated and should certainly be factored into longer term financial support. Any post-crisis fiscal stimulus should be designed to help companies currently not aligned with the net-zero transition goal to rapidly pivot in order to align operations, strategy and capital expenditure. Subsidies should be targeted at the transition to a net zero economy. Policymakers need to consider the full range of potential impacts that must be integrated into policy design from the start, not as an afterthought.

A number of industries are seeking government bailouts as a result of the impacts of the pandemic that would appear to offer no strategic return for taxpayers faced with the reality of a rapidly heating planet. For example, airlines across the globe, crippled by the global lockdown, have demanded lasting relief from environmental taxes and requested bailouts from governments. Such measures would be a set-back for environmental goals and would not incentivise the industry to shift its practices. At its current rate of growth, by 2050 air travel threatens to consume a quarter of the entire carbon budget the world can still emit to meet the stretch climate targets set by the Paris Agreement.⁴ Worse still, data from England shows that the majority of air travel is undertaken by only a fraction of the population.⁵ Whilst governments have imposed new levies to slow the growth in air traffic and emissions, and the European Union plans to begin taxing jet fuel, this is unlikely to be enough to pivot the industry from its currently unsustainable trajectory. Instead of granting the airlines their wish, governments should use access to bailout funding as an opportunity for rapid course correction. Airlines should be required to invest in cleaner technology and streamline service offerings to ensure flights are full. Prices would also need to increase – in part through paying taxes – to reflect the environmental damage caused by the fuel used and a frequent flyer levy would need to be set at a level appropriate to the contribution frequent flyers make to aggregate carbon emissions from the sector. If loans are provided, the interest rates could be linked to the achievement of sustainability milestones – thereby incentivising action from recipient firms.

The principle should be clear: when you take money from society, you owe society something in return. Adding these proposed conditions to bailouts is not without precedent: in the wake of the 2008 global financial crisis, the then US President Barack Obama used the government bailouts of General Motors and Chrysler to compel them – and by extension the entire automobile industry – to accept stringent new fuel-economy standards.⁶

This does not mean that every company will have to dismantle its business model or cut jobs. Instead, in many cases, it will require an accelerated shift in the substitution of service and product offerings to make them more sustainable as well as a plan of action attached to retrain and redeploy staff as needed. Government bailout conditions should be complemented by measures to support this labour transition.

Beyond fiscal stimulus packages, climate goals must be incorporated across the whole spectrum of policymaking. The UK Committee on Climate Change’s advice in its Net Zero 2050 report provides detailed and science-based recommendations across government departments. It is also a useful guide for other countries considering how to transition to a net-zero economy.
A pressing area of focus for governments is the need to avoid building infrastructure that will lock-in high emissions – such as the expansion of oil and gas infrastructure. Such actions will make it impossible to reach net zero and risk stranded assets. Instead, the focus should be on stimulating investment in infrastructure needed to reduce emissions: such as nationwide electric and hydrogen infrastructure, carbon capture and storage clusters (CCS) to decarbonise industrial emissions and spending on public transport and cycle networks. Investing in training to deliver the skilled workforce needed to deliver these outcomes is vital. Such investment is an economic stimulus that both benefits the climate and creates high-quality jobs which is crucial given increasing automation and the loss of many jobs due to the pandemic.

Once again, the need for equitable change should drive funding choices, including through the creation of subsidies for lower income households to improve the affordability of new technologies or grants to support the labour transition from old to new industries. Strengthening the global digital infrastructure, notably in more remote areas that are poorly serviced, will not only provide greater connectivity and all the advantages it brings to underserved groups, which has proven to be a lifeline for many during the pandemic, but will also help lock-in some of the reduction in travel-based emissions seen during lockdowns. These efforts would also go a significant way to addressing the health inequality caused by air pollution, which has been identified as one of the factors affecting the poor more than the wealthy in general – and specifically in the case of COVID-19.

Economic recovery and growth must be linked with both climate goals and a just transition. We have an opportunity to learn from the global coronavirus pandemic which has shown what is possible when the public and private sectors work together, in good faith, towards a shared goal.

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. The information herein is believed to be reliable, but Federated Hermes does not warrant its completeness or accuracy. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

This article is an extract taken from the Parliamentary Network publication ‘Just Transitions’. You can download a pdf version of the full document here.

1. “Special Report: Global Warming of 1.5°C” published by the IPCC in October 2018.
2. “Global Climate in 2015-2019,” published by the World Meteorological Organisation in April 2020.
3. The Paris Agreement entered into force on 4 November 2016, building on the United Nations Framework Convention on Climate Change (UNFCCC).
4. “Analysis: Aviation could consume a quarter of 1.5°C carbon budget by 2050,” published by Carbon Brief in August 2016.
5. According to data released by the Department of Transport, 48% of people living in England did not take a single flight abroad in 2018, while the top 10% of frequent flyers in the country were responsible for almost half of all international travel.
6. “How the carmakers Trumped themselves,” published by The Atlantic in June 2018