Climate change and financing a just transition

A just transition to a green economy is more urgent than ever. The international community increasingly recognizes the role that businesses play in affecting both the environment and society. To ensure a just transition, the financial sector should consider environmental and social outcomes in equal measure.

Climate change and environmental degradation pose significant challenges to economic growth and employment today, and risks will be greater in the medium-to long-term. By contrast, climate change action and the shift to a green economy can lead to more and better jobs. Both adaptation to climate change and measures to mitigate greenhouse gas (GHG) emissions offer opportunities to create new jobs, while securing existing ones. However, this needs to be carefully managed through just transition policies and processes, to avoid that economic changes result in increased social inequality, worker disillusionment, strikes or civil unrest and reduced productivity, as well as less competitive businesses, markets in the sectors affected.

A just transition 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. A just transition involves maximizing the social and economic opportunities of climate action, while minimizing and carefully managing any challenges – including through effective social dialogue among all groups impacted, and respect for fundamental labour principles and rights. The ILO Guidelines for a Just Transition to Environmentally Sustainable Economies and Societies for All adopted in 2015 by tripartite consensus provide detailed guidance in this regard.

The financial sector is instrumental in enabling this transition because it can provide capital and efficient risk-sharing mechanisms. Integrating a just transition logic in the operations of the financial sector can generate positive social and environmental outcomes, while minimising and addressing potential negative consequences such as stranded assets, job losses and a declining local economy.

As a key intermediary of economic activities and risk transferring, the financial sector is pivotal to making sure that a response to climate change does not ignore social impacts and outcomes.

The work of Social Finance on climate change and just transition

  • Impact investing: Investors are becoming more interested in addressing climate change issues through their targeted investments. Examples include investments in clean energy access, sustainable forestry and sustainable agriculture. The Africa Agriculture and Trade Investment Fund (AATIF), one of ILO’s longstanding collaborations with impact investors, seeks to finance agricultural businesses that consider climate change adaptation and mitigation activities. As part of this commitment, AATIF has recently updated its impact measurement framework to include an environmental dimension that contains climate change mitigation and adaptation indicators. Through technical assistance, AATIF supports its investees to understand and manage climate risks in their businesses. For example, AATIF assists financial institutions to undertake a climate risk analysis of their loan books to understand the potential impacts of climate change on their loan portfolio. The goal is to develop solutions to identify, adapt and mitigate potential risks, according to the Task Force on Climate-Related Disclosures recommendations. Another example is a feasibility study that AATIF conducted (page 21) to explore innovative financial incentives. The study explored the scope for offering lower interest rates as an incentive to Ghanaian cocoa and maize farmers to adopt agricultural practices that increases the household’s resilience towards climate change.
  • Financing of a just transition: The financial sector plays a crucial role in enabling the transition to a net-zero economy and has a major influence on both climate-related and social outcomes, which goes far beyond the sector’s own operational footprint. This impact comes both from the sector’s business practices, but also from the activities it facilitates by providing capital and access to financial services in a broader sense. The ILO, through its ongoing work to operationalize the just transition guidelines and the Climate Action for Jobs Initiative, collaborates with financial sector players to generate practical knowledge and guidance and to assist with an on-the-ground testing and impact measurement of just transition investments and financial services. One example is the ILO input paper to the G20 discussions around Transition Finance. Furthermore, a Knowledge and Technical Assistance Facility on “Innovations in Just Transition Finance” will be established to share insights and provide guidance on how to coherently incorporate both private and public sector investors in a just transition financing ecosystem.
  • Livelihood restoration: The ILO also provides assistance to households whose livelihoods have been disrupted due to climate change. For example, in Pakistan (2013-2016) the ILO was involved in a joint initiative with UN Women, FAO and the ILO to protect agriculture-dependent rural communities from repeated cycles of floods and drought. The project provided in-kind support to restore and protect farm production capacities and off-farm income generating activities. Along with the credit, health insurance benefits provided access to organized health facilities to prevent recipients from falling back to poverty. 
  • Business interruption insurance: Insurance is an important mitigation tool to help businesses remain operational, or resume operations soon after natural disasters. In partnership with the Munich Climate Insurance Initiative, the Climate Risk Adaptation and Insurance in the Caribbean (CRAIC) project supports countries in adapting to climate change by incorporating climate risk insurance into their disaster risk reduction strategies. The project works with the government agencies to instil risk-reducing behaviour in the communities and to link insurance with disaster risk management measures that can help in reducing risk and increasing resilience to climate hazards. A new product, the “Livelihood protection plan”, acts as a business continuity tool for small businesses and individuals by covering the risks of business interruption due to high-speed winds and extreme rainfall. 
  • Agriculture insurance: Agriculture is the backbone of many developing economies, however it is highly dependent on the weather. For example in India, only 40 per cent of agricultural land is irrigated, while the remaining 60 per cent is subject to unpredictable weather patterns. There is evidence that rural women suffer more from climate related events than men do, as 75% of their income is agriculture dependent. Supported by the Ford Foundation, the ILO and local partners are using a variety of methodologies to promote insurance strategies in rural development policies and programmes. It is part of a holistic approach to agricultural development and risk management against climate change. Similarly, the ILO is collaborating with IFAD to promote climate insurance as a crosscutting tool in rural development initiatives. The partnership promotes insurance in rural development policies and strategies, increases sustainable access to holistic insurance schemes by rural households, and increases knowledge and capacity on sustainable use and development of climate insurance. An assessment of the climate insurance markets has been completed at three levels: micro (individual), meso (organizational) and macro (government and policy). The ILO also collaborates with Celsius Pro to develop and implement agriculture and climate risk insurance programmes of the investees. This is done through a combination of knowledge-sharing and capacity-building activities, including workshops and communities of practice. The project stimulates exchange among the investee partner organizations, which help develop an inclusive insurance market. This should accelerate the offer of risk-management solutions for agricultural enterprises, households and individuals.
  • Insurance against natural catastrophes: Natural catastrophes disrupt income generating activities of MFIs and their customers, but they disproportionately affect women; especially those in areas that are prone to risk (storms, droughts and floods). Not only do they face more difficulty in repaying their loans because of low financial resilience, but they are also more vulnerable in the aftermath of a disaster. Given the impact of natural catastrophes on MFIs and clients, the ILO has partnered with Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) to raise awareness among MFI clients in India about natural catastrophe insurance and the related "NatCat" product. Through this project, we created awareness raising materials and animations for use among both MFI customers and MFI loan officers. The ILO also supports GIZ in developing a training guide that MFI loan officers can use when explaining the risks of natural catastrophes to clients, as well as for handling their queries and objections. The pilot project is conceived and implemented in collaboration with the Micro Finance Institutions Network of India.