The concept of a “just transition” is becoming more important for investors as private credit and equity funds are playing an “increasingly vital role” in financing the move to net zero, new research has found.
The concept of a just transition refers to the need to address the social risks and opportunities arising from the shift to net zero greenhouse gas emissions as part of climate action.
According to the Grantham Research Institute at the London School of Economics, renewable energy investment backed by alternative assets more than tripled between 2021 and 2024, with private markets helping to address a shortfall in public and traditional sources of finance for the transition.
A report by the institute examined how 23 specialist private equity and credit funds embed just transition principles in their energy infrastructure investments.
The report found that investors view action on the just transition as an important risk management tool, making it “commercially prudent and aligned with fiduciary duty”. Investors largely regard just transition considerations as “good business practice” rather than values-based commitments, the report said.
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The research found that all of the funds interviewed demonstrated just transition-aligned activity in practice, yet only two of the 23 specialist funds explicitly refer to the just transition in their investment policies.
According to the paper, labour-focused interpretations of the just transition dominate, even among specialist funds, with most measures centred on baseline protections and regulatory compliance.
In private credit, sustainability-linked loans were found to be the primary instrument used to embed sustainability considerations into portfolio companies’ operations, the report said.
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However, the report identified several barriers to wider adoption of just transition considerations in private markets. These include limited understanding of what constitutes a just transition in specific investment contexts, a lack of standardised, sector-specific metrics and both perceived and actual trade-offs between financial returns and social impact.
The paper recommended that regulatory frameworks should define baseline expectations for private funds, establishing minimum acceptable thresholds for just transition practices.
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