There is a clear consensus among policymakers that an energy transition must happen to limit temperature increases to 1.5° C by 2050. Let’s look at the social aspects of the transition—namely, the cost of energy and economic development, which have received less attention up until now. Moving forward, policymakers will have to balance these competing demands to potentially accomplish a Just Transition.
Social costs
An immediate step to reducing temperature increases would necessitate a reduction in the overall production of energy, and most likely require the rationing of energy. Costs in terms of unemployment would be considerable— for instance, in the United States, 7.5 million people were employed in the energy, energy efficiency and motor vehicle sectors as of 20201. Statista reported that number as 257,284 in Canada for 20212. The natural response is to say that these workers could be retrained in the renewables sector, but this is not an easy transition: many of the skills acquired are specialized and new roles may not be available within the same region—if at all. There would have to be significant additional public investment in skills and education.
But it isn’t only employment that would be affected. For example, in the United Kingdom, 13% of households in England, 25% in Scotland, 12% in Wales and 18% in Northern Ireland3 were classified as fuel poor—and an increase in these numbers is anticipated if access to fossil fuels is curtailed in the short term. Households in fuel poverty are more likely to ration energy, which can lead to increased risks, particularly in colder months as this may lead to increases in certain conditions such as bronchitis and asthma. The direct impact is estimated to cost the UK £1.3 billion a year, but the indirect costs are likely much higher4.
Looking to the future, developing nations will require significant amounts of energy over the coming years, having not had the chance to grow their economies fully and benefit from the ensuing increases in standard of living. Fossil fuels will most likely be crucial to this, given the supply constraints faced in the energy market.
Further, 2.5 billion people in the developing world currently lack access to clean cooking facilities5. They rely on alternatives such as wood, which contributes to 3.8 million deaths every year6 . In response, the IEA estimated that liquefied petroleum gas could be used to quickly scale up and achieve access to clean cooking by 2030, whilst at the same time reducing greenhouse gas emissions— highlighting the positive changes that fossil fuels can bring about.
These examples reinforce the importance of a Just Transition and highlight the social externalities that must be considered when pushing for decarbonization: previously, they had not received full attention, but can now be factored into investment decisions.
Implications for investors
Changes in personal behaviors — Investors can make small behavioral changes in shopping and product-usage habits, for example, to positively contribute toward A Just Transition. Individually, each change will be small, but collectively added together, they’ll make a big difference.
Increased investment in clean energy is needed — Given the drawbacks of renewable energy sources, investment is required to increase their scalability and effectiveness, representing a key opportunity to investors. Put simply, the renewables sector has capacity to grow further and capturing this could be an important focus of investor portfolios.
But not just clean energy — Renewables will have a pivotal role in our future energy mix. That said, it is questionable that they will be able to fully meet our energy needs. Given this reality, it will be necessary to increase energy efficiency—particularly in carbonintensive sectors. Investors hopefully will be able to buy into firms with lower emissions, such as those in the technology sector.
Enact positive change through engagement — Previously, a blanket exclusion of non-ESG stocks was seen as the best way to reduce their negative externalities. However, this approach means that the firm in question will not be rewarded for positive change as it will be divested regardless of its actions—leading to an incentive problem. By contrast, holding non-ESG stocks that are taking corrective actions may improve environmental outcomes. For example, if a firm can grow efficiency and make improvements, it may reduce negative externalities overall.
At RBC Wealth Management, we look for asset managers who work with companies to improve their environmental practices. We believe engagement should be a key pillar of any sustainable investment strategy and it has the potential to have a more material impact than simply investing in stocks with already strong environmental credentials.
Overall, we believe this more balanced approach to sustainable investing is more aligned to a transition to a low carbon economy while mitigating the negative social impacts of reducing fossil fuel consumption rapidly.
Sources
1. U.S. Department of Energy. United States Energy & Employment Report, 2021
2. Statista. Number of people employed in the energy sector in Canada from 2011 to 2021, 2022
3. Fuel Poverty. House of Commons Library, 2022.
4. What is Fuel Poverty? s.l. : National Energy Action, 2022.
5. IEA. Access to Clean Cooking. s.l. : International Energy Agency, 2021.
6. WHO. Air Pollution. s.l. : World Health Organisation, 2022.
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