Amundi: Facilitating a just transition for climate

A just transition seeks to minimise the negative externalities of the shift to a low-carbon economy, while maximising the positive externalities involved. Amundi believes that investors have a major role to play in facilitating a socially acceptable environmental transition. The investment manager has therefore developed what it believes is a first-of-its-kind just transition for climate strategy that addresses both the environmental and social challenges that we face with the transition toward a low-carbon economy.

Why this approach?

The Paris Agreement sets a framework for encouraging investors and stakeholders to drive down carbon emissions. Several asset managers have, in the past, sought to address the transition to a low-carbon economy. However, they all adopt an environmental focus, their priority being to help investors and companies support the climate objectives defined by the Paris Agreement. Thus, they tend to ignore the social dimension of the transition, despite the clear statement of the Paris Agreement recognising “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs”.

Amundi, however, seeks to address the just transition concept: its conviction is that the transition to a low-carbon world will only be successful if it is socially acceptable. Amundi’s Just Transition for Climate strategy is based on this conviction. The overarching objective is to push corporates to start or accelerate their low-carbon transitions whilst fully accounting for the social impacts of those transitions.

In concrete terms, the strategy addresses climate change by a clear and measurable carbon reduction objective (measured in carbon intensity, across Scopes 1, 2 and 3, using Trucost data) and the constant monitoring of the portfolio temperature score (in degrees Celsius, using Iceberg Data Lab information).

On the social side, the strategy addresses just transition objectives through the managers steering the portfolio’s just transition score so that it is consistently above that of the investment universe. This is achieved by selecting companies that have factored in the impacts of their transition on society. Amundi’s proprietary Transition Score is based on four pillars. Investee companies should ensure that:

• Employees in industries that are restructuring can find jobs in sustainable businesses, actively contributing to the transition, and are protected from the harmful effects of climate change;
• Consumer goods are accessible to all at affordable prices;
• The costs and benefits of the transition to local communities are equitably shared; and
• All stakeholders fully play their role and participate in constructive dialogue.

Amundi designed a just transition rating system to measure the performance of issuers relative to their peers on specific social issues. Each dimension is weighted according to its importance in the social acceptability of the transition. Continuous monitoring and dialogue with issuers ensure that scores and weightings are adjusted as necessary.

The workers pillar currently has a 50% weighting, with the three others sharing equally the other 50%. The rationale is that the impact on workers is probably the most direct, large, extensively studied, and transparent of the four.

The Just Transition strategy is asset agnostic, and can be equally applied to bonds and equities. Amundi has started to deploy the strategy through a bond portfolio operating within the Euro High Grade Corporate universe.

It aims to launch US and Global versions of the strategy at a later stage. The fund, Amundi Responsible Investing – Credit Just Climate Transition, uses the Bloomberg Barclays Euro Aggregate Corporate Index as its benchmark. Amundi’s process aims to construct a well-diversified credit portfolio without any structural sectoral bias. Although it excludes companies with large carbon footprints, the purpose of the strategy is not to exclude outright entire sectors, such as carbon-intensive energy. All sectors need to participate in the low-carbon transition, and companies that have had large carbon footprints in the past but have drastically reduced those footprints should be encouraged to keep up their efforts.

Outcomes, benefits, challenges and next steps

The transition to a low-carbon economy will have profound employment and economic impacts. Research published by Eurofound shows that although the overall impact on GDP and employment should be positive, impacts will vary considerably among sectors. For example, there is expected to be a substantial reduction in the number of people employed in the mining and utilities sectors, of 17% and 3% respectively.

The Just Transition for Climate strategy aims to channel private investments towards companies that have set themselves on a path to a low-carbon trajectory while putting in place measures to mitigate the negative impact of the transition on their employees and society at large.

The positive outcomes of the strategy will largely be driven by Amundi’s stewardship activity. It will engage with investee companies by strengthening its dialogue on ESG topics, including the just transition. The main purpose of this dialogue will be to support investees in their own transition, but also to disseminate best practices in an effort to drive the better integration of sustainability in their operations and business models.

Its strategy is based on a dynamic view (as opposed to static carbon reduction approaches) by using corporate emission reduction targets, innovative temperature metrics and in-house just transition criteria which highlight the need for corporates to clearly explain their transition plans.

Amundi’s just transition score, which captures the performance of companies across various pillars (employment security, training and education, tax behaviour, stakeholder dialogue and social impact of products, among others) will help the fund manager enhance its dialogue with investee companies. This is a powerful tool aimed at comparing corporates with their peers on a systematic basis.

A challenge that Amundi faced when constructing the just transition criteria was the lack of standardised and robust data points on social issues, compared with those available on the environmental side. Its view is that both pillars of the transition must be addressed simultaneously. It will therefore encourage regulators and data providers to address transition issues, which will in turn enhance the availability, reliability and usability of social data. It is developing a Just Transition for Climate range of products, applying the same philosophy to other geographies, starting with global and US credit.

Given that working towards a just transition is one of Amundi’s core convictions, the fund manager will more widely integrate its just transition score across the firm. By engaging with data providers and working alongside investee companies, it aims to continuously improve the way investors integrate social acceptability with the environmental objectives of the low-carbon transition.