Some companies are making strategic transition to adapt to sustainability issues facing their business model or industry (e.g., the energy industry). While all industries could be said to bein transition, sustainability transition for some industries require more fundamental shifts in factors of production and therefore require substantial financing. For these companies, it is important to be accountable not just for the outcome of their transformation (e.g., 2040 or 2050 targets), but also the transition pathways, including intermediate steps and scenarios on how the transition will actually be achieved.
In addition, an impact thesis can be formulated around the transition itself and how the social and environmental impacts can be maximized during the transition, 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 a net zero.
Managing the sustainability impact of the transition is the core concept behind the just transition. It is also an important motivation to minimize the redundancy of stranded assets from a macroeconomic perspective. Finally, the sustainability transition should factor the notion common but differentiated responsibility of countries.
“Just Transition” is a key requirement of the Paris Agreement, with guidelines established by the 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 recent publication, Just Transition: A Business Guide, [The Just Transition: A Business Guide. The Just Transition Centre and the B Team. 2018.] 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 suggest that companies choose emissions reductions plans that also promote sustainable development – that drive environmental sustainability, jobs and decent work, social inclusion and poverty eradication. More specifically, they suggest that emission reduction plans should:
- Result in the net creation of decent jobs within the company and its supply chain;
- Provide for retention, reskilling and redeployment for workers as part of the company’s transformation, rather than redundancies;
- Include equal opportunities for training and employment opportunities for women, young people, the poor and other marginalized groups, as well as measures that produce equitable outcomes; and
- Drive investment in community economic diversification or renewal.
Minimizing stranded assets
While achieving the SDGs opens 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.[‘Stranded assets’ are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities. Source: Stranded Assets Programme.]
While it is understandable that investors would want to reduce their exposure to such stranded 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. See for example: Moving to a Low-Carbon Economy: The Impact of Policy Pathways on Fossil Fuel Asset Values. October 2014. ] In these circumstances, positive social impact can be created by not only financing new technologies, but also by supporting the transition process as companies change their business models or adopt new technologies. Transition strategies could include re-purposing older assets, retiring assets, and retraining the workforce. The goal is to enable an orderly transition from stranded assets while minimizing negative economic and social impact.
Common but differentiated approach to the sustainability transition
The United Nations Framework Convention for Climate Change (UNFCCC) introduced the notion of common but differentiated approach to the sustainability transition that acknowledges the different capabilities and differing 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, recognizing 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 and additionality of companies’ SDG impacts, since the same private sector solution or technology might provide a different impact based on the relevant social and economic development context.