Some companies are making strategic transitions to adapt to sustainability issues facing their business model or industry (e.g., the energy industry). While most industries today are in transition, sustainability transitions require a more fundamental shift in production models for some industries and, therefore, require substantial financing. It is important for these companies to be accountable not just for the outcome of their transformation (e.g., 2040 or 2050 targets) but also for the transition pathways—the steps and scenarios on the way to the desired sustainability goal.
In addition, an impact thesis can be formulated around the transition itself and how its social and environmental impacts can be maximized, with separate strategic goals, impact measurements, and financing needs. For example, companies may put in place programs to retain, retrain, and redeploy employees who work in areas that are being phased out in the transition to net-zero emissions.
The core concept behind the just transition is managing its sustainability impact. It is also an important motivation to minimize the redundancy of stranded assets from a macroeconomic perspective. Finally, the sustainability transition should factor into the notion of “common but differentiated responsibilities” of countries.
Just Transition
Just Transition is a key requirement of the Paris Agreement, with guidelines established by the International Labour Organization (ILO): [Guidelines for a Just Transition Towards Environmentally Sustainable Economies and Societies for All. ILO. 2015.]
“A just transition for all towards an environmentally sustainable economy…needs to be well managed and contribute to the goals of decent work for all, social inclusion, and the eradication of poverty.”
In a 2018 publication, Just Transition: A Business Guide, the Just Transition Centre and the B Team articulated the role of companies in the just transition to net-zero emissions:
“The goal is to reduce emissions and increase resource productivity in a way that retains and improves employment, maximizes positive effects for workers and local communities, and allows the company to grasp the commercial opportunities of the low-carbon transition.”
The guide suggests that companies choose emissions-reduction plans that also promote sustainable development and drive environmental sustainability through jobs and decent work, social inclusion, and poverty eradication. More specifically, it suggests that emissions-reduction plans should:
- result in the net creation of decent jobs withinthe company and its supply chain
- provide for retention, reskilling, andredeployment of workers as part of the company’s transformation (rather than creatingredundancies)
- include equal opportunities for training andemployment for women, young people, the poor, and other marginalized groups, aswell as measures that produce equitable outcomes
- drive investment in community economicdiversification or renewal
Minimizing stranded assets
While achieving the SDGs opens up opportunities for new technologies and markets in many sectors, it can also render certain assets and solutions less relevant or even undesirable. For example, the clean- energy transition may cause some incumbent assets in the power industry to become obsolete. Such assets are often described as stranded assets. According to the Stranded Assets Programme at the Smith School of Enterprise and the Environment, “stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities.”
While it is understandable that investors would want to reduce their exposure to such assets, there may be a societal loss when these assets, which represent substantial economic investments and significant sources of employment, are abandoned. [See research on this topic by the Climate Policy Initiative, for example: Moving to a Low-Carbon Economy: The Impact of Policy Pathways on Fossil Fuel Asset Values. 2014.] In these circumstances, positive social impact can be created by not only financing new technologies but also supporting the transition process as companies change their business models or adopt new technologies. Transition strategies could include repurposing older assets, retiring assets, and retraining the workforce. The goal is to enable an orderly transition from stranded assets, while minimizing their negative economic and social impact.
Common but differentiated approach to the sustainability transition
The United Nations Framework Convention on Climate Change (UNFCCC) introduced the notion of “common but differentiated” to the sustainability transition—acknowledging the various capabilities and responsibilities of individual countries in addressing climate change. In establishing their impact thesis, companies should consider the sustainability transition context of the country in which they operate and recognize that certain countries might adopt a different path to the energy or sustainability transition. This is important in ensuring that corporate impact theses are aligned with countries’ own sustainability plans. It is also important to assess the relevance of companies’ SDG impacts, as the same private-sector solution or technology might provide a different impact based on the specific social- and economic-development context.
