In 2015, the Paris Agreement introduced a new term, “Just Transition” (JT), encapsulating the notion that climate action must be combined with social inclusion to find a way forward in the climate crisis (United Nations, 2015). The original definition has evolved in the last seven years towards a focus on delivering a climate-neutral economy in a fair way, that leaves no one behind, with a focus on developing a lower-carbon, more resource-efficient, and more socially inclusive economy for a Net-Zero future (European Commission, 2022). Moreover, the Just Transition mission has also expanded beyond climate change mitigation into adaptation, defined (in this case) as helping those already impacted by climate change (United Nations, 2022a).

If climate action is implemented simultaneously with the socio-economic empowerment of vulnerable communities, there could be a net job gain of 24 million jobs by 2030 (Lee, 2022). Thus far, various publications, particularly the G7 Impact Taskforce report on Capital Mobilization for JT (to which BlueOrchard has been an active party), have been influential in setting the necessary financial guidelines and strategies for the JT mission. Considerable work remains to be done, however, as asset and impact managers explore the optimal standards, guidelines, and financing structures for an efficient and effective JT (Spengler, Arnoldi and Moses, 2021).

Currently, there are three widely accepted standards identified by the Impact Taskforce that JT strategies must fulfill: (i) advance climate and environmental action, (ii) improve socio-economic development and equity, and (iii) increase community voice. Climate action strategies that are part of JT initiatives must not solely focus on climate action but must view and strategize climate action as an impact area that is intersectional with socio-economic development. In other words, JT strategies must be characterized by intersectionality, not duality: climate action empowering socio-economic action, not climate action separately and in addition to socio-economic action or vice-versa. For example, a strategy that builds sustainable infrastructure while cutting jobs in an unprivileged community, setting below standard wage conditions for its workers, causing workplace and health issues, and interfering with the overall well-being of a settlement, could not be deemed as promoting JT if it simply adds an additional socio-economic element that appears to counteract the damage.

Perhaps the most fundamental element of JT is the emphasis on community voice, recognizing that true socio-economic impact is impact that is generated according to the grievances and needs of communities on the receiving end of initiatives. A 2019 Global ESG survey by BNP Paribas showed that 46% of investors found the “Social” component of ESG the most difficult to analyze and embed in investment strategies. Maintaining a dialogue in which all vulnerable groups and affected communities provide their opinions is difficult and requires significant resources and time, and asset managers and market participants to prioritize the dedication of significant resources to increasing community voice, developing tools to provide a platform for communities to speak up about their needs, and creating systems to ensure any representative of a community is selected based on meritocracy and/or democracy, if they are to be effective.

What the JT means in practice

BlueOrchard’s InsuResilience Investment Fund, launched in 2017, was born out of the need of emerging countries to cope with the effects of natural disasters and extreme weather events and their lack of access to insurance or any other financial products for risk management. The fund was founded at the initiative of the German Development Bank KfW, on behalf of the German Ministry for Economic Cooperation and Development BMZ, which provided concessional equity for both an equity sub fund and a debt sub fund on a two-fold approach for a just transition: climate action and financial empowerment of vulnerable communities. Structurally, the IIF is an umbrella fund composed of a private debt sub-fund and a private equity (PE) sub-fund with an additional technical assistance facility (TAF). The PE sub-fund consists of local players involved in the insurance value chain. The private debt sub-fund provides loans to financial institutions that are linked to insurance products, which target micro, small, and medium enterprises (MSMEs) and households that are most vulnerable to climate change impacts.

In creating the fund, particular effort was made to ensure that it would be able to serve the three standards references above:

1. The fund advances climate and environmental action. Namely, by supporting climate adaptation through building resilience to climate and weather events via customized climate insurance products, the IIF allows farmers to continue farming even at loss of harvest and to invest in technologies that boost their productivity.
2. The fund improves socio-economic development and equity. A significant portion of costs associated with climate change are direct results of the lack of insurance, planning, and infrastructure required to cope with damages. The insurance offerings of institutions funded by IIF allow farmers to produce higher quality seeds and crop protection, and to keep their children in school during periods of financial stress associated with climate change.
3. The fund increases community voice.

• First, to ensure tangible and measurable social impact, the fund defines the intended beneficiaries concretely. For instance, IIF defines “poor” and “vulnerable” in nominal terms, as those having an income of less than USD 3.10 purchasing power parity (PPP) and USD 15.00 PPP a day respectively.
• Second, the fund ensures that products offered by investees are customized to the cultural and social contexts as well as to the specific necessities and barriers faced by end-beneficiaries. For instance, the private debt sub-fund conducted tailored qualitative and quantitative investee and end-client surveys in Pakistan to obtain feedback on the climate insurance products offered and, subsequently, to ensure that the insurance products reach their intended impact in their respective social, geographic, and cultural contexts.
• Third, the fund identifies the educational needs of its end beneficiaries and conducts relevant awareness-raising financial literacy workshops. For instance, for an equity investment in Nigeria, the fund invested time and resources into comprehending the major barriers of entry and information for end-clients. With the gained knowledge that digitalization is a key solution to empowering vulnerable communities that face barriers of access to climate data and insurance products in real-time, the fund worked with the company management and Board to upgrade the IT systems and develop a digital platform to expand the information access of end-users.

Considerations for an effective JT

When developing climate strategies, asset managers must first ensure alignment with the three standards of JT: (i) advance climate and environmental action, (ii) improve socio-economic development and equity, and (iii) increase community voice.

Subsequently, asset managers must place great emphasis on the third principle of increasing community voice by defining tangible and quantifiable impact measurements, customizing products and services to their respective contexts, and by adding further value to their investments through TAFs.

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Sources

BNP Paribas. (2019) The ESG Global Survey 2019. Just Transition Finance Challenge (2022) Impact Investing Institute. Available at: https://www.impactinvest.org.uk/project/just-transition-finance-challenge
Lee, S. (2022) Issue Brief: Just Transition. Incorporating Just Transition into the design and implementation of Nationally Determined Contributions and Long-Term Strategies.
Larrea, J. (2022) “What does today’s macro-economic outlook mean for blended finance?” Available at: https://www.convergence.finance/news-andevents/news/6iCWW2xYZeUEWGFkBRLjWS/view.
OUTREACH AND IMPACT – InsuResilience investment fund (no date) Insuresilienceinvestment.fund. Available at: https://www.insuresilienceinvestment.fund/outreach-and-impact/ (Accessed: October 5, 2022).
Robins, N., Brunsting, V. and Wood, D. (2018) Climate change and the just transition: A guide for investor action.
Spengler, L., Arnoldi, L. and Moses, R. (2021) Mobilising institutional capital towards the SDGs and a Just Transition.
The (2021) “Sustainable finance is rife with greenwash. Time for more disclosure,” Economist (London, England: 1843), 22 May. Available at: https://www.economist.com/leaders/2021/05/22/sustainable-finance-is-rife-with-greenwash-time-for-more-disclosure (Accessed: November 23, 2022).
The Just Transition Mechanism: making sure no one is left behind (2020) European Commission – European Commission. Available at: https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/finance-and-green-deal/just-transition-mechanism_en
United Nations (2015) Paris Agrement. Available at: https://unfccc.int/sites/default/files/english_paris_agreement.pdf.
United Nations (2022a) Glasgow Climate Pact.
United Nations (2022b) Trade and Development Report: Development prospects in a fractured world.

About the authors

Alessandra Nibbio Bonnet is the Head of Blended Finance at BlueOrchard. Alessandra has over eight years of experience in advisory and impact investing in emerging and frontier markets with previous roles at Innpact and Accenture. She obtained her Master of Science in Management from Bocconi University and her bachelor’s degree in Economics and International Organizations from University of Ferrara.

Yasemin Ramazanoglu works with Alessandra in the Blended Finance team at BlueOrchard. After a year of working in Leveraged Finance and Financial Sponsors investment banking at UBS in New York City, she joined BlueOrchard in the summer of 2022. Yasemin obtained her bachelor’s degree in Economics and Sociology from Georgetown University.

The published essay represent the views of the authors alone, and do not reflect the opinions of either the EDFI Association or its member institutions.