Comment letter to Impact Investing Institute Just Transition Finance Challenge on draft Criteria

March 20, 2023

Re: Impact Investing Institute Just Transition Criteria – Draft for Public Consultation

Dear Impact Investing Institute,

We are grateful for the work of your organization in the Just Transition Challenge, together with its participants and partners, on building practicable frameworks for steering investment capital to solutions that address climate change holistically; i.e., including through consideration of its socio-economic dimension. We are also grateful for the opportunity to respond to your draft Criteria.

Future Nexus is a research and engagement consultancy based in New York City, with specializations including just transition, sustainable and development finance, industrial policy and public investment, and climate finance. As examples of our work, we have authored guidance for the global private and public sectors on the topic of Financing a Just Transition, on behalf of the UN Global Compact and International Labour Organization, respectively. We have also worked with a broad range of other clients and partners on the topic of just transition, in relation to corporate, financial, and public actors, including the We Mean Business Coalition, the International Organisation of Employers, the U.S. Impact Investing Alliance, the Sierra Club, the Roosevelt Institute, E3G, and the Harvard University Initiative for Responsible Investment. As such, we consider ourselves a key stakeholder in the global development of the discourse and tools related to financing a just transition.

Generally speaking, we find that your draft criteria reflect well the general principles and components of a just transition, and provide a strong basis for the design, evaluation, and communication of investment strategies and products aiming to support a just transition. Below we offer some ideas for your consideration in response to your consultation questions, and conclude with a general comment.

Q1. In addition to the use cases proposed in this section, a robust just transition investment framework can also generate possibilities for improved learning and coordination across investors, within and across regions, and with other stakeholders, including governments. Just as many investors are seeking opportunities for greater coordination in the design and implementation of their climate strategies, for example through Climate Action 100+, it can be expected that investors will seek similar opportunities in their support for a just transition. Achieving the vision of a just transition will depend on lessons being shared, across stakeholder groups, across regions, among investors, and across investment types. Consciously addressing this potential in the design of your framework can improve not only its uptake but also its impact.

Q2a: Generally speaking, we are of the view that although investment-/project-level sustainability performance should be an important criterion for investment decisions, the greatest contributions to just transition will be achieved through coordinated strategies that target structural transformation. Not only do coordinated strategies deliver greater system-wide impact, but they also allow individual investments to achieve outsized impact by identifying and acting on synergies with the actions and strategies of other stakeholders, including other investors and governments.

In specific reference to the question on interlinking KPIs, we believe that key KPIs can be identified and interlinked through reference to broader strategies in which the investment is proposed to play a role. That could include, for example, regional and sectoral transition pathways, as constructed in coordination with governments. Reference to such strategies and related KPIs can improve interoperability, legitimacy, public support, and impact of related investments.

Q2b: As recognized in the three Elements of your framework, just transition comprises both a process (community voice) and outcome dimension, which includes both climate and socio-economic impacts. Generally speaking, we find the linkages between community voice and impacts could be strengthened in your framework. Item ‘g’ on page 14 of your consultation document indicates possibilities in this vein; for example, using Element 3 (community voice) to identify local needs, to be addressed in Element 2. We believe there is significant scope to develop these linkages, not only between Elements 3 and 2, but also Elements 3 and 1, as well as to introduce more rigorous requirements. For example, in addition to evidence of engagement mechanisms, the framework can also recommend or require the disclosure of key results from such engagements, including, potentially, community feedback on the key objectives/KPIs formulated in relation to Elements 1 and 2. In addition, engagement mechanisms can also be an important component of evaluation, and the framework could constructively reflect this, with more explicit requirements or guidance regarding how investors can be expected to respond to key community concerns.

Q3a: We find this approach robust, though, in line with our suggestion above to develop linkages between Elements 3 and 2/1, we also see some scope for providing more direct guidance to investors regarding the best practice or requirement to use engagement processes in Element 3 to inform strategy and indicators adopted in relation to the the ‘Do No Significant Harm’ criteria for the other Elements. It can be difficult for investors to know the primary concerns of local communities, without which knowledge a bona fide assessment of ‘do no significant harm’ is impossible. In the context of this framework, requirements for community engagement can be usefully leveraged to provide insight on and strengthen the strategies for achieving climate and social impact.

Q4a: The proposed approach is robust in principle, though the design of this criterion should also reflect that many just transition-related projects already face substantial constraints on financial and technical capacities, even relative to local climate investments, and therefore limits on financial access. Many of the investments most needed in the just transition may have no impact track record and/or underdeveloped impact frameworks. The investment criteria should reflect the bias that already exists, and potentially even incorporate a manner for investors to meet certain of the framework’s criteria through support for capacity development among investees, in addition to or instead of other impact (measurement) requirements.

In addition to this, we believe the framework could better reflect the seventh Operating Principle for Impact Management: ‘considered exits’. Framework criteria which trigger automatic divestments have the potential to do more harm than good. As above, we suggest that the framework incorporate more scope for engagement and capacity development among investees, as an additional, substantive manner of delivering impact—particularly to prevent unmanaged exits.

Q3b and Q4c: Regarding KPIs for Community Voice, we believe there are interesting lessons to be learned from the realm of public investment. In the United States, for example, obligations to workers and communities are increasingly formulated in concrete terms, as specific criteria/standards for investment, such as requirements for community benefit agreements and/or project labor agreements. These structures are critical for the achievement of key economic, social, and environmental objectives, because they not only provide evidence of early and meaningful engagement with workers and communities, but also ensure that their concerns and objectives are incorporated into investment plans, following negotiation among key stakeholders. These structures might serve as a fruitful template more broadly, for investors seeking concrete ways to design, substantiate, and deliver the socio-economic benefits that matter to local communities.

In conclusion, we would like to reiterate one central principle, which we have come to value increasingly as our work in just transition has deepened, and greater incorporation of which we believe will benefit the uptake and impact of your framework. That is, in essence, that achieving a just transition means achieving a durable and systemic transformation, which depends on broader coordination, and oftentimes on public leadership. Individual investments can play an important part in the vision of a just transition, but their meaning and impact is multiplied to the extent they act as components of broader strategies: strategies which, as relevant, bridge the Global North and South, cut across economic sectors and industries while being coordinated within them, are aligned with regional and national plans, and, perhaps most critically, benefit from the policy levers and tools, the data and perspective, and the social trust of local and national governments.

From our seat, we have seen in many contexts that sustainable and impact investors increasingly agree that structural transformation depends on public leadership. Investors look to policymakers not least for the financial incentives (credit enhancements, tax breaks, etc.) which propel investment in target industries and sectors (and with the right conditions), but also for the coordination of a broad range of policy tools to achieve those goals, including financial and industrial regulation, trade, procurement, and labor policies, and more. Equally importantly, governments play a leading role in devising the development strategies which signal to the private sector and other stakeholders the intended direction of strategic development, through, for example, NDCs and credible regional and sectoral pathways.

Notably, this new sense regarding the expected role of governments is not confined to developed economies, where governments have far greater fiscal capacity to embark on green industrial policy. Rather, it is also increasingly visible in how the climate transition is approached globally, including in the context of Just Energy Transition Partnerships and new expectations for multilateral development finance institutions. In sum, investment is increasingly undertaken implicitly or explicitly in coordination with official plans.

As you seek to build a framework with staying power through what might prove to be a meaningful paradigm shift regarding the desired and even necessary level of coordination between the private and public sectors, especially with regard to economy-wide transition strategies, we believe that the just transition investment framework can and should anticipate and reflect the principle of greater cooperation and alignment between private investment and the strategies, policies, and investments of public authorities. Currently, your proposed framework for strategy-level due diligence mentions investment/issuer engagement with local governments as one aspect to be investigated, and the importance of public/private alignment is highlighted in your real estate-specific guidance. In our view, this represents a good start, but fails to account for the broad and deep importance of this issue across all investments and investment strategies. We believe this issue should receive greater emphasis in the framework, and be built out accordingly with related criteria and KPIs.  

Again, we would like to express our gratitude for your diligent, thoughtful, and constructive work on building a framework for just transition investment. It is a necessary effort, and we are pleased it is in good hands! If you have any questions or would like to discuss any of these points further, I would welcome the opportunity.

Best regards,