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Opinion

COP28: Here's how a just transition from fossil fuels can save us

The transition from fossil fuels to clean energy will be complex, but investing wisely is one way we can make a positive difference, says Kim Goodall, Impact Analyst at The Big Exchange

Protesters carrying banners against fossil fuels

Protests at Canary Wharf, London, on 19 October. Image: Vuk Valcic / Alamy Stock Photo

There’s a lot of talk about just transition around COP28, the international climate change meeting. A just transition reflects the need to move from a high-carbon economy dependent on fossil fuels (oil, gas and coal) to a low-carbon economy in a way that is fair to both people and planet. It’s a moral issue as well as an environmental one. 

Communities, industries and employees are dependent on fossil fuel activities, so moving away comes at a cost. Those countries reliant on fossil fuels in Asia and the Emerging Markets need help to transition. Social measures such as compensating those involved in fossil industries and training existing and future workers with the skills needed to participate in the green economy is important. 

However, it’s more complex than simply switching to green energy: the supply of renewables must meet demand and infrastructure is needed to store and distribute renewables. 

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There’s a filter on The Big Exchange (TBE) website that allows customers to sort funds to only those that are “fossil free”*. 

One such fund is the Schroder Global Energy Transition fund. It invests in companies involved in the transition towards lower carbon sources of energy – eg clean energy generation, distribution, storage, transport and associated materials, components and technologies – and excludes companies that generate revenue from fossil fuels and nuclear energy. The FP WHEB Global Sustainability Fund also excludes fossil. 

Excluding fossil fuel companies is one approach. Another approach which is less well understood is to prioritise the transition to a low-carbon world by engaging with companies. Fund managers “engage to change” to reduce risk, while looking to maximise the opportunity to investors. Company engagement can help identify barriers to transition so that they are addressed, and faster progress can be made. 

If you simply sell out from a company, you lose your say. Regular engagement with set targets drives change. If sustainability targets are missed, the fund manager can still sell its holding. Impact reports shown on fund managers’ websites are a good way to find out how fund managers are working with the companies they invest in. 

The UK regulator, the Financial Conduct Authority (FCA), is proposing to introduce sustainability disclosure requirement and investment labels to increase transparency and help investors better navigate the market. 

One of the proposed labels is ‘Sustainable Improver’, where the aim is to improve the environmental and/or social sustainability of assets over time, including in response to the stewardship influence of fund managers. This label recognises that with the right support and engagement, transition is possible. 

Some fund managers choose to set a very low ceiling on possible fossil fuel holdings which can be less than 5%. This can be a bit like food labelling – there are no allergens in the ingredients, but there is still the possibility of a trace of the allergen. For fund management, this can be related to supply chain and, in the case of manufacturers, their product components and product use. 

On The Big Exchange, we have a range of funds that meet the necessary criteria to get a minimum of a bronze medal. Those funds invest in companies making a positive difference to people and the planet, which we assess though our due diligence process. 

* The Big Exchange (TBE) uses a range of information and proprietary research to determine whether a fund is fossil free. Firstly, we use a third-party independent assessment to look for fossil holdings. Secondly, all fund managers must complete a questionnaire describing in detail their policy and providing a full list of their holdings on a range of controversies including fossil. Thirdly, our staff review the portfolio holdings before onboarding and at least annually. All information is correct as at the time of the last assessment.  

Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change. 

The Big Exchange (TBF) Limited is a wholly owned subsidiary of The Big Exchange Limited. The Big Exchange (TBF) Limited is an Appointed Representative of Resolution Compliance Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 574048)

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