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Are your investments enabling a Just Transition?

Here’s how financial institutions can rebalance a portfolio for net-zero commitments while managing the impact on people, the planet, and profits.

Engineers winch tools up wind turbine from boat at offshore windfarm

As lenders, advisors, insurers, investors, and brokers to companies in the real economy, financial institutions are poised to play a critical, enabling role in the global transition to a net-zero economy. Their influence will determine what gets funded and when, for how long, and under what conditions. And indeed, at COP26 in November 2021, financial institutions responsible for US$130 trillion of global capital recognized their critical role by pledging to align their financing activities to net zero by 2050. (For context, financial institutions held US$469 trillion in assets in 2020.)

If that transition is to be a just one, the steps they take to rebalance their portfolios cannot be reduced to a simple binary decision to keep or divest from assets—as some shorter-term stakeholders demand. Nor can it be a simple carbon-budgeting and -accounting exercise. Portfolio decarbonization brings with it potential financial, political, and social risks, such as energy and financial insecurity, stranded assets, lost jobs, and economic decline. If they’re not addressed, these risks could undermine the viability of financial institutions’ net-zero strategies and the credibility of the financial institutions themselves. Moreover, simply divesting carbon-intensive assets is not guaranteed to lead to real-world carbon reduction, because that depends on the buyer’s own commitment to tackling climate change. Even investment in renewable energy value chains can create unexpected systemic and geopolitical risks. Batteries for electric vehicles require lithium, for example, but some regions with large untapped reserves of lithium are currently mired in conflict or human rights controversy.

A Just Transition will require balancing complex trade-offs between social, economic, and environmental issues and carbon-reduction goals. Such trade-offs may be familiar to financial institutions, which have been managing the impacts at some level for the past two decades. But without great care, the pace and scale of transformation required by the net-zero transition could prioritize decarbonization at the expense of all else. To avoid that outcome, financial institutions should consider a different strategic approach for different types of assets. In each case, the approach would consider not just what to finance but also how to do so, including which conditions might be attached and which corollary activities—such as public finance partnerships—might be involved. We’ve identified five approaches to consider:

• Green finance: increasing finance for low- or zero-carbon activities that are central to the global transition to a low-carbon economy. These require greater investment by financial institutions but also may raise urgent social and systemic questions.

• Decarbonization engagement: collaborating with businesses in high-emitting activities where financial institutions can wield significant influence to support decarbonization.

• Conditional transition finance: limiting new investments in high-carbon activities that nonetheless require continued investment, with appropriate conditions in place, as part of a net-zero energy transition.

• Managed phaseout: financing high-emitting assets that are being retired earlier than planned to support a net-zero energy transition. To avoid social harm, this approach requires clear commitments and careful planning with stakeholders beyond the financial institution.

• Responsible divestment and exclusions: agreeing to no new lending or investment in and careful divesting of existing assets that conflict with an institution’s net zero–aligned portfolio, to minimize social harm and achieve real-world emissions reductions.

Green finance

Green finance is arguably the most straightforward path for financial institutions. Such investments, broadly defined as those that facilitate a reduction in greenhouse gas (GHG) emissions or the carbon intensity of an activity, are imperative to achieve the transition to net zero. Financial instruments to consider in this context are those that include conditions based on measurable final outcomes. These encourage institutions to consider the entire scope of their impacts and ensure they are sufficiently targeted. For example, consider sustainability-linked loans, which provide incentives for borrowers to achieve ambitious, predetermined sustainability-performance objectives, such as preventing the runoff of pollutants from new nickel mines into water sources.

Even investment in renewable energy value chains can create unexpected systemic and geopolitical risks.

Despite their inherent positive impacts, green finance investments still require rigorous assessment to ensure that the transition to net zero is socially just and nature-positive. Failure to consider wider impacts could risk creating or worsening other harms. Consider, for example, the growing demand for batteries to facilitate the transition. Batteries will be needed for many parts of a net-zero society, but especially to power electric vehicles (EVs)—estimated to comprise a US$46 trillion market by 2050. Market growth this significant will accelerate demand for raw materials, such as lithium, cobalt, and nickel. The extraction of these minerals in such quantities—on average six times more for an EV than for internal combustion engine vehicles—will present several key risks for investors to consider. These include relative carbon emissions from the extraction process, the health and livelihoods of workers, and potential environmental impacts other than climate change.

Even investments classed as green finance may still result in some carbon emissions, which may vary depending on geography, energy sources, and technological inputs. For example, the nickel required to produce batteries for EVs must be Class 1 nickel, which has more than 99.8% nickel content. As supplies of Class 1 nickel dwindle, manufacturers will turn to an energy-intensive process to refine lower-quality nickel—which, in turn, increases the amount of carbon embodied in an EV battery. Likewise, most lithium is currently extracted from hard rock mines using fossil fuel energy sources, emitting around 15 metric tons of CO2 for every metric ton of lithium. And since the resources needed to produce a lithium-ion battery tend to be more geographically concentrated than fossil fuels, EV investors could see associated supply chain risks, particularly in relation to the S of ESG. For example, two-thirds of the world’s supply of cobalt is mined in Democratic Republic of Congo, where the US Department of Labor, among others, has raised concerns over working conditions, especially with regard to child labor and worker health.

Similarly, investing in the expansion of nickel mines, if not carefully managed, can also threaten local livelihoods—as the dust generated from toxic metals can, when not controlled, decrease local soil fertility even after mining has ceased, reducing nearby agricultural productivity. This is of particular concern in the Philippines, for example, which is one of the world’s most biodiverse countries and the second largest supplier of nickel. Absent meaningful action plans to protect already endangered species and the area’s pristine rainforests, some nickel mining practices can represent a serious risk to biodiversity and to the livelihoods of local communities.

Decarbonization engagement

For reasons of energy and economic security, there are circumstances that may prevent immediate phaseout of fossil fuels. As of 2018, the Carbon Tracker Initiative found that 400 million people lived in the 19 most vulnerable countries with the greatest fiscal dependence on oil and gas revenue. Ten of these countries were categorized as “low” in the United Nations Human Development Index, including Chad, Nigeria, and South Sudan, and are particularly vulnerable in the transition to a net-zero global economy. Even outside of emerging economies, many businesses, communities, and local governments are reliant on jobs provided by fossil fuel companies. In such instances, financial institutions will need to engage with the companies they invest in, supporting efforts to minimize their carbon footprint and to transition their business models for a low-carbon future.

Financial institutions that continue to invest in companies with assets in high-emitting and hard-to-abate sectors, such as oil and gas, steel, and cement, may need to engage with them more actively than with companies elsewhere. First, they’ll need to consider what steps those companies are taking to reduce their carbon footprint. Do they have a credible transition plan in place? Are they investing in clean technologies? Will they retrofit or switch power sources? Have they developed business models to succeed in a low-carbon economy? With such questions answered, financial institutions could influence companies to employ more resource-efficient processes to reduce carbon emissions in the short term—and to invest in research and development in technology for longer-term reductions.

As with green technology, financial institutions will also need to engage with companies to assess transition business models from a social perspective—how they will create job opportunities and reskilling for workers who may otherwise be adversely affected. A number of resources are available that offer financial institutions guidance on addressing the Just Transition within their net-zero policies.

Conditional transition finance

Should all new financing for fossil fuel projects come to a halt, or are there situations where “conditional finance” can be justified? In the run-up to COP27, rising energy security concerns combined with calls for climate justice on a global scale are gaining a new, louder platform, sparking debates over exactly this question—and leaving financial institutions to develop nuanced exclusion policies and financing mechanisms that seek to balance both objectives.

Conditional transition finance is defined as investment in high-emitting sectors that may be justified on the grounds of meeting a gap in essential goods and services (such as energy access), energy security, and genuine social impact. Such investments should still aim to mitigate environmental harm to the greatest extent possible, with a trajectory to net-zero alignment by 2050 at the latest, but they should also meet strict conditions for validating social benefits.

Natural gas, in particular, has been debated for its role as a transition solution to a range of immediate energy security and access concerns, while producing fewer CO2 emissions per unit of energy than alternatives like coal or oil. As a reliable source of energy, natural gas can serve as a backup to manage intermittency of supply while renewables come to make up a greater proportion of total energy capacity. Such arguments have gained greater prominence in Europe in recent months, where countries in search of alternatives to Russian gas are accelerating renewables production and importing gas from alternative international partners. Many are also pursuing new fossil fuel projects—and resurrecting old ones—including a North Sea drilling operation for gas; the development of a North Sea natural gas field; and a gas pipeline from Spain to France and central Europe. The situation has been deemed so urgent that even coal plants are being restarted in places.

In emerging markets, climate justice considerations come to bear more heavily in terms of energy access. The UN’s Sustainable Development Goal 7 aims to “ensure access to affordable, reliable and modern energy for all by 2030,” yet 770 million people globally continue to live without access to electricity, 77% of whom live in sub-Saharan Africa. And demand is only expected to increase with Africa’s population forecast to double to 2.5 billion by 2050. Energy access is essential not only for economic development but for a myriad of other social goals, including gender equality, quality education, and health and well-being. Models that account for both the need to achieve net zero by 2050 and expand electricity generation for economic development forecast the need for investment in a mix of energy sources in Africa over the medium term, including in both renewables and gas. The continent does have a collective 455.2 trillion cubic feet of natural gas reserves. And although some proposed projects would contribute an estimated billion metric tons or more of CO2 each over their lifetime, Africa collectively has thus far been responsible for only 3% of global emissions to date (and sub-Saharan Africa—excluding South Africa—just 0.55%).

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Investment in new gas projects requires management of significant financial and reputational risks for investors. Global pressures to decarbonize alongside the increasing competitiveness of renewable energy increase the risk of new gas projects becoming stranded assets, and those that depend on them for their livelihoods becoming stranded communities. A credible Just Transition plan should demonstrate how such risks will be mitigated. Spain’s recent suggestion that its planned additions to the country’s gas infrastructure can be transformed for export of green hydrogen may prove to be an interesting example. Such proposals require robust feasibility studies to confirm that transitioning from gas to hydrogen is practical, that safety protocols can prevent leakage and dangerous combustion, and that the communities involved see real economic benefits.

Financial institutions will need to consider their own criteria for conditional finance to facilitate assessments of which fossil fuel projects—if any—may qualify, and on what basis, specifying criteria across a range of social, environmental, economic, and climate-related considerations to ensure a Just Transition. Some conditional financing instruments, including use-of-proceeds instruments such as certain transition bonds, make it possible to require such elements. If fossil fuel projects are deemed necessary for energy security or access reasons but are unable to secure sufficient private financing in light of net-zero commitments, blended finance may have a legitimate role to play in bridging the gap.

Managed phaseout

High-emitting assets account for significant direct or indirect production of GHG emissions. These include energy assets (such as coal mines, oil fields, and fossil fuel power stations), industrial sector assets (such as traditional cement plants and steel mills), and consumer sector assets (such as vehicles). CO2 emissions from existing and planned energy infrastructure alone, if operated until the end of design life, would exceed the global carbon budget by 66%. This highlights the urgent need to phase out high-carbon assets on an accelerated time frame, or as the International Energy Agency (IEA) describes it, “Retire dirty early.”

A managed phaseout involves a range of strategies, from closing and decommissioning the asset to environmental remediation, where sites are restored to ecological productivity. Redevelopment can then follow—for example, repurposing a coal site for a solar farm. Retiring assets on an accelerated timeline necessitates Just Transition considerations, especially in national or local contexts where such assets are particularly significant. Stakeholder consultation, adequate planning, and management and assistance provision through policies are required, as is putting people at the heart of the low-carbon transition. Take just one energy source, for example: coal is a priority area for managed phaseout as, in the words of the IEA, “both the largest source of electricity generation and the single largest source of global carbon emissions.” As a phaseout of coal becomes more urgent, so do the trade-offs with energy security and allowing sufficient time and support for workers to be retrained, relocated, or even to retire.

Financial institutions that are exposed to high-emitting assets, whether directly (through project finance or insurance) or indirectly (through financing companies and other real-economy asset owner-operators), can play a part in managed phaseout by influencing decarbonization strategies and providing financial support. According to the World Bank, “Insufficient funding is the biggest barrier to physical mine closure and land reclamation taking place in a satisfactory manner.” Social remediation costs, such as social package payouts, must also be met. This will require mobilization of public and private finance, alongside financial assurance mechanisms to provide security and guarantee funding availability.

Financial institutions that are not currently exposed to high-emitting assets may still consider financing them if the objective is to retire them early. The Asian Development Bank (ADB) has launched an Energy Transition Mechanism (ETM) to accelerate the transition from coal to clean energy in Southeast Asia in a just and affordable manner. This has received support from HSBC, among others. The ETM has two financing schemes—one aimed at buying coal-fired power plants to close them on an accelerated timeline, or otherwise incentivize owners to retire facilities early; the second, to invest in renewable power to replace lost capacity. A Just Transition is an “integral part of the ETM,” and is coordinated with ADB’s Just Transition Facility. This includes an assessment of Just Transition activities, such as employment and livelihood implications.

Responsible divestment and exclusions

Financial institutions are facing growing pressure to divest from ownership of fossil fuel equities and bonds, and end fossil fuel sponsorship. For some, divestment is a relatively quick and simple way to reduce portfolio (financed) emissions—though only 11 of the 240 largest members of the Glasgow Financial Alliance for Net Zero (GFANZ) rule out all financial service provision to companies building new coal mines, plants, and infrastructure. For others, it’s part of a broader strategy that combines a threat of divestment with real engagement. The multinational asset management company Schroders, for example, sets out the climate expectations of all investees, including the requirement to set a net-zero target across Scopes 1, 2, and 3, and a transition plan to get there. Alongside these expectations, Schroders sets out an escalation practice for action the manager will take if their expectations are not met: ultimately, failure to meet expectations over a time frame will result in divestment.

For a Just Transition, financial institutions should take into account local/regional/national contexts. For instance, they might provide a later timeline for excluding investment in developing nations with high economic dependence on coal, such as Indonesia. The KfW Group’s exclusion list makes an exception for financing heating stations and cogeneration facilities fired with coal in developing countries, subject to a rigid sustainability assessment. Also, as critics point out, simply removing finance won’t necessarily reduce real economy emissions. Divestment might slow decarbonization, for example, if assets move from transparent public markets where pressure can be applied to less transparent private markets where they aren’t scrutinized so closely. Perversely, it can even lead to higher emissions—not lower. If it leads to reduced asset value, for example—lowering a company’s stock price—it could attract new owners who are more motivated by financial returns than any effects on the environment and society, and who are less subject to legislative or political pressure.

Objections notwithstanding, demands for financial institutions to divest carbon-heavy assets from their portfolios continue. All told, the divestment database—a website managed by in partnership with— tracks fossil fuel divestment commitments totaling over US$40 trillion in assets, more than the annual GDP of the United States and China combined. Many of these institutions argue that engagement on its own does not work even after years of targeting companies.


THERE ARE NO simple solutions to the difficult questions and trade-offs that arise in the transition. What is clear, however, is that a narrow focus on decarbonization will not succeed if other economic, environmental, and social impacts are not considered. Sustainable development at its heart is about creating economic growth that is decarbonized, fair, and nature-positive. The five practical approaches outlined above provide a framework for financial institutions to play a critical, enabling role in financing a Just Transition to net zero.

For a deeper discussion of the framework and additional case examples, please see the PwC report “Navigating a Just Transition to net zero: A framework for financial institutions.”

Author profiles:

  • Joe Crotty advises clients on sustainability with a focus on the financial sector. Based in London, he is a senior associate with PwC UK.
  • Margot King advises clients on sustainability and net zero. Based in London, she is an associate with PwC UK.
  • Alexandra Lockyer advises clients on sustainability and international development, with a focus on gender and social inclusion. Based in London, she is a senior associate with PwC UK.
  • Jon Williams is PwC’s global banking and capital markets ESG leader and chairs the UK sustainability and climate change practice. Based in London, he is a partner with PwC UK.
  • The authors would like to thank Priyanka Kanani, James King, Jenny Mill, and John Tress for their contributions to this article.
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