If the UK is to avoid repeating the mistakes of the 1980s, when the UK economy abruptly began transitioning away from coal mining and traditional industry, the transition to net zero must gain widespread support across all parts of society, requiring action from both government and business.
Amid the daunting headlines around COP28, one cause for optimism is the growing recognition that the transition to net zero must be just and equitable if it is to succeed. People on lower incomes are most at risk of the negative effects of climate change, including losing jobs in higher emissions sectors like mining and construction, being more exposed to extreme weather and bearing higher costs of essential goods.
There is also growing evidence that the finance sector realises that a Just Transition is imperative. According to consultancy PwC, financial institutions have recognised the critical enabling role that they have to play in achieving the net-zero transition.
A recent PwC report stated: “As lenders, advisers, insurers, investors and brokers to the assets of the real economy, they wield significant influence. Increasingly, financial institutions are committing to net-zero targets and developing climate transition plans to achieve these. The success of these net-zero ambitions hinges on the transition being just and equitable, in a local and global context.”
The transition to net zero by 2050 will require investment in the region of £1.4 trillion ($1.8 trillion; €1.6 trillion) in the UK. This means capital will need to be mobilised at a rate not seen before. In addition, new skills and business models will be needed to help society decarbonise, and most importantly there must be buy-in – communities must be active and willing participants in the transition. This is where social investment can play a vital role.
What is the role of social impact investing?
As the UK’s leading social impact investor, we are focused on helping to ensure that the transition to net zero is just for all of society. Launched 12 years ago with funds from dormant bank and building society accounts and UK high street banks, we have helped grow the social impact investment market from less than £1 billion in 2011 to more than £9 billion, tackling social issues and inequalities in the UK such as homelessness and financial inclusion.
Close to one-third of our investments made to date have been Just Transition-aligned, and focus on such investments is growing as social impact investors and organisations develop new business models that address the most pressing issues facing communities across the UK. With the right investment, there are major opportunities to reduce inequality and generate benefits that far outweigh the costs, including through new decent green jobs, lowering energy bills and reducing the strain on health services caused by air pollution and damp, cold homes.
Fuel poverty is already a serious issue in the UK; low income and vulnerable people and communities are disproportionately exposed to climate change and to the impacts of transitioning to a net-zero economy.
The statistics are stark. An estimated 6.3 million households in the UK’s live in fuel poverty – where more than 10 percent of household income is required to keep the home at a reasonable temperature. Poor energy efficiency of a home is a key driver in fuel poverty and more than half of low- to middle-income working age adults in England live in homes with poor energy efficiency.
One of the best examples of social impact investment helping to address these issues is Agility Eco, a leader in low-carbon, energy efficiency and fuel poverty services. Last year, it helped reduce energy use for 37,000 households at risk of fuel poverty, generating average lifetime energy bill savings of more than £2,600 per household, as well as cutting emissions by 113,000 tons.
The benefits of services such as these goes beyond energy savings. Some 20 percent of excess winter deaths in the UK are attributed to cold homes. And the improvements delivered by AgilityEco are estimated to save the NHS close to £7 million from better health and care outcomes.
Big Society Capital has played a major part in catalysing investment in social and affordable housing – with co-investors, we have invested more than £1.4 billion in high-impact social housing, providing good quality homes for disadvantaged and vulnerable people. The next challenge is to develop investable models and crowd investment into retrofitting and improving energy efficiency in existing social housing.
The UK needs to radically expand its renewable energy infrastructure to meet the government’s stated target of decarbonising electricity fully by 2035. Just 0.5 percent of the UK’s electricity is currently generated by community energy schemes, yet with sufficient capital investment there is capacity for this to grow twentyfold in 10 years, according to the UK Environmental Audit Committee.
BSC has helped financed close to half the UK’s community energy projects to-date, bringing 157MW of wind and solar farms into community ownership, avoiding 32,000 tonnes of CO2 emissions annually and helping create an estimated £40 million in community benefit funds.
The Community Owned Renewable Energy (CORE Partners) initiative is a great example of a social investment partnership model in action, connecting investors, Government, businesses, charities and communities.
It is in areas such as this that the investment community could play a vital role. The CORE programme is acquiring operational solar farms in England with the objective of converting them into community-owned assets. CORE was the first project to successfully raise institutional investment into community energy, when Abrdn provided £30m senior debt in 2021.
Moving forward together
A skilled workforce is also required for the UK’s transition to net zero – in retrofit, heat pump installation and other areas where the necessary skills are lacking. We are exploring investment models that integrate green skills development to tackle the delivery challenge and support vulnerable, lower income and underserved people to access good-quality green jobs. In particular, where they are displaced from carbon-intensive industries.
The transition to net zero will be fraught with challenges but there will also be benefits and opportunities. For example, PwC research found that in the UK, the multiplier for green jobs is estimated to be 2.4x – meaning that for every green job created, there are another 1.4 jobs that can be attributed to that green job. However, the benefits of the transition to net zero cannot be realised unless the social risks inherent to such a large-scale global industrial transformation are addressed at the same time.
The best way of achieving a successful transition is to give people a stake in it. A Just Transition is the only way to achieve the massive society buy-in that is needed for success. The £9 billion social investment market is relatively small when compared with the scale of investment needed for net zero, but the market’s growth trajectory is promising, and its partnership model can play an outsized role in delivering a sustainable future that works for everyone.
Stephen Muers is CEO at Big Society Capital