Covid-19 sounded the alarm in 2020 on the social agenda by revealing how exposed the poor, the vulnerable and marginal communities were to the effects of the pandemic. In 2021 that distributive gap was deepened by unequal vaccine access and distribution.
When it comes to climate change, there is a ticking time bomb on global equity that is not in plain view but could jeopardize our ability to achieve net zero goals if we continue to allow policy approaches to crowd out the social agenda, panelists warned at an international conference on the role of the financial sector in climate change-related risks.
Speaking on the first day of the Green Swan 2021 conference convened by The Bank for International Settlements, the Bank of France, the International Monetary Fund and Network for Greening the Financial System, panelists said that failure to attend to poverty and inequality in the low-carbon transition could wipe out years of hard-won progress.
Studies have shown that climate change impacts are not evenly distributed within regions, and poorer people are more vulnerable.
Panelists warned that investors and policymakers will be on a collision course if we continue the current default towards ignoring or relegating social issues to a second order priority.
"Social issues need to enter into the finance world. Climate has pushed out considerations about workers and communities and distribution. Social cohesion is a pre-condition of a low carbon transition," said David Wood, director of the Initiative for Responsible Investment (IRI) at Harvard's Kennedy School of Government.
"Historically, climate change and issues to do with human rights have been managed separately and addressed by different frameworks," said Fiona Reynolds, chief executive officer of the UN Principles for Responsible Investment (PRI). This separation is mirrored in the term ESG – where climate change is seen as an "E" issue, which makes it easy for investors to overlook the social impacts of climate change.
Covid has been a wake-up call to investors on social issues. "If you don't have healthy people and a healthy planet, you're not going to have a healthy economy or businesses," she said.
Reynolds added that the term "stranded assets" is rarely used to describe people as "stranded". "A poorly managed transition to net zero could lead to a lot of stranded people," she warned.
Talking about the Just Transition, panelists emphasized that fossil fuel jobs in OECD countries, for example, have benefited from union protection and long-term job security. New jobs in renewable energy do not provide similar social protection.
Wood warned that the shift from coal-fired power plants to wind energy in the United States – a mid-west to Northern mid-west move – has revealed that new jobs are more precarious, not unionized, and often offered on a seasonal basis.
"Unless we ensure that precarity is addressed in the transition, the social in cohesion that results will make structural transformation impossible," he said.
Ann Pettifor, director of Policy Research in Macroeconomics (PRIME), a network of mainly Keynesian economists, argued that the current "scattergun" policy approach to climate change needs to change – put the focus on the richest rather than on everyone.
Key targets should be the richest 10% of the population who are responsible for half of the world's consumption emissions, and the 100 corporations responsible for 71% of global emissions.
Wood called for a global North/South lens to address global inequality. Currently, the decarbonization transition tends to be viewed as a national problem, a consequence of the Paris Agreement and its voluntary system of nationally determined contributions. For example, shifts in low carbon transport means huge shifts in supply chains and resource gathering which will drive human rights risk and political risk.
The role of investors
"Investors say the number one issue they are working on is climate change," said Reynolds of PRI. "We are trying to elevate human rights to the same level of importance as climate change in our work programmes."
She added that if decarbonization leads to visibly increasing inequalities in society, it risks hampering climate action because of social and political backlashes that it will trigger.
Wood of IRI noted that workers and communities simply don't figure in corporate decarbonization plans, and this is something that investors need to prioritize: "So how can investors bring those issues to the fore in scenario planning?"
He gave an example of best practice in the Solidarity Funds in Quebec, a worker-owned and led supplemental retirement fund that emerged from the labour movement. "They've engaged their workers directly about their fears and opportunities around decarbonizing in their sector."
Panelists also discussed the importance of industrial policy, and the risks of staying the current course in the finance sector where the default assumption is that adequate disclosure will allow the finance sector to naturally adjust to financing a low-carbon world.
"We need to think about controlling and reshaping our economic forces," said Wood. "We need to drive finance towards more lower-carbon activity and a fair distribution of costs and benefits in the transformation."