Why a just transition must be part of any corporate net-zero strategy

By Jack Robinson and Thomas Trier Hansen

What is the just transition?

The science has never been clearer about the need to transition away from fossil fuels and reduce greenhouse gas emissions. Countries, businesses, cities, and people all have a role to play. As we begin to undo the fossil fuel stitching that has sewn the fabric of society together for centuries, there will be winners - and there will be losers.

There are swathes of society who fully or partially depend on fossil fuels for a living. Those with a lifetime of training and experience in fossil fuelled industries will be challenged finding new employment. One company, factory, or industry may be the beating heart of a community, and if that is removed, the entire region can suffer. For others, the transition may be smoother, with slight re-training required to perform similar functions in the low-carbon future of work.

A just transition means that no one is left behind. Initially promoted by labour unions during COP16 in Cancun, Mexico, the just transition is a concept that calls for a transition of the existing workforce and the creation of decent work and quality jobs. The just transition requires plans, policies, and investments to ensure that communities are resilient to the fast changes required to meet international climate goals. It requires job creation through seizing new economic opportunities, as well as minimising the disruption for people and communities currently dependent on the fossil economy.

But why should businesses care?

Shouldn’t governments be responsible for protecting workers’ rights, education, and retraining? Shouldn’t companies be able to layoff and hire as they see fit? If certain parts of the business become unprofitable, then surely it is in the company’s best interest to restructure, sell assets, lay off parts of the workforce, and hire new talent in the areas they need?

A just transition is the only transition that makes business sense. It’s easy to talk about opportunities for businesses, with new jobs, innovation potential, and new markets, but when it comes to the inevitable restructuring and layoffs, businesses must consider what an unjust transition could look like in order to see the value for one that is just.

An unjust transition will be costly

All companies with a net-zero 2050 target will face big decisions about how their business needs to change, some sooner than others. There is a strong likelihood that the changes required will entail partial or total restructuring, and therefore, job losses. How many, where, and when, depends on the industry and company in question. If companies do not properly plan for these jobs, workers, and ultimately communities, they could face huge costs.

There have been many examples where poorly managed layoffs have cost companies. Costs can come through protests, strikes, lawsuits, loss of revenue through a tarnished reputation, reduced productivity in the remaining workforce, increased turnover and hiring costs or all of the above – resulting in the loss of social license to operate.

Businesses who are able to plan early, retrain workers, and proactively manage layoffs as part of a just transition may be able to instead capture the value associated with improved reputation and increased productivity of an empowered workforce.

An unjust transition could disrespect human rights

Many businesses pride themselves on respect for human rights, and adherence to global labour standards. The UN Guiding Principles on Business and Human Rights (UNGPs) state that companies have a responsibility to respect human rights. There is an increasing expectation for companies to apply human rights due diligence, including when they adopt new business models, change their operations or operating contexts, or initiate new activities, projects and/or products. Companies should assess and address actual and potential adverse human rights impacts, track responses to these impacts, and communicate how impacts are addressed.

This expectation has in recent years been converted into legal requirements as in the case of the EU Taxonomy regulation. In the context of climate change, this means, among others, addressing negative human rights impacts related to their transition to a low-carbon economy.

Companies who do not consider the just transition risk falling short of these human rights standards. For example, if an energy company is forced to close a coal plant, hundreds of people may be laid off. These jobs may be supporting a whole community and in the worst cases, these communities may be isolated and without access to alternative employment. Thus, the impact of that unplanned and unjust transition could impact the right to decent work of the former employees negatively and may have human rights consequences for the communities supported by those jobs.

Although failure to respect human rights or comply with UN Guiding Principles on Business and Human Rights may not result in direct litigation, the companies may face other consequences such as reputational damages, investor distrust or a challenged social license to operate.

Businesses who start planning early and engage the workforce through social dialogue are also able to work with policy makers to increase the speed and scale of just transition planning and reduce the costs and impact for the business. Training programmes and other education opportunities may be developed in connection with local authorities, for example.

An unjust transition could block access to finance

Since 2015 (when the just transition featured centrally in the Paris Agreement), momentum has grown in the investor community, with more than 160 investors with US$10 trillion in assets under management signing an international statement to support the just transition.

Investors are being encouraged to incorporate the just transition into their investment strategy, engage with companies they own, shift capital to assets aligned with a just transition, advocate for policy, and build further capacity in the sector. This could mean that in the future, how well companies are considering the just transition could be a factor for investment decisions and baked into ESG scoring.

¬The EU Green Deal also puts the just transition at the front and centre with a Just Transition Mechanism designed to help mobilise at least €65-75 billion over the period 2021-2027 in the most affected regions, to alleviate the socio-economic impact of the transition. Additionally, in order for companies to comply with the EU Taxonomy requirements, they must meet minimum social safeguards, including being aligned with the UN Guiding Principles and the OECD Guidelines for Multinational Enterprises.

The transition has already begun

We are already seeing the first wave of climate-related policy and legislation, with fossil fuels on the way out. The Dutch government banned the installation of gas heaters in new homes in 2018, the UK government recently the same, starting in 2025. The UK has also banned the combustion engine in new vehicles from 2030. If companies are not planning to transition on their own accord, climate policy and legislation will eventually force them to, in order to meet international targets.

Where to start: understand and engage

Businesses who are able to understand how their net-zero strategies will affect the workforce and communities, as well as engage in social dialogue, will be best placed to prevent or mitigate risks and boost opportunities.

Understand

As a first step, when companies are drafting their net-zero strategies, they should assess how these strategies may impact human rights negatively and adopt measures to prevent or mitigate this impact. This is also known as conducting human rights due diligence. If companies have already formulated such strategies, they should apply human rights due diligence when implementing the strategies.

Engage

Stakeholder engagement is crucial part of that process. The ILO recommends co-creation of plans through social dialogue between workers and employers, and potentially governments and communities. This could include all phases of planning a transition, from initial discussions about climate action, to analysis and setting goals, through to planning, delivery, monitoring, and reporting.

Companies can provide access to information and a remedy for those who risk becoming vulnerable in the transition. Transparency and openness about efforts to become net-zero are key to just and orderly transitions.

In case companies are failing, the company should provide potential victims of an unjust transition with an access to a remedy, for instance by setting up an effective grievance mechanism or supporting such mechanisms.

Looking ahead

Many companies have used COP26 as a springboard to launch corporate net-zero strategies, and the focus on climate is only likely to increase in the future. But without consideration for what these net-zero strategies could mean for workers and communities, the plans are short-sighted, sub-optimal, and incomplete. Only those that enable a just transition will provide companies with the resilient workforce required to succeed in the turbulent times ahead.

About the authors

Thomas Trier Hansen is a chief advisor on responsible business conduct in Ramboll Management Consulting having worked in more than 50 countries on various aspects of human rights over the last two decades.

With an MS.C in Climate Change, Jack Robinson is a rising talent specialising at the intersection of strategy, communication, and climate action.