Just Transition: Managing the social impact of a low-carbon transition

Key points:

  • ‘Just transition’ is an emerging concept which considers the impact on workers and communities of the global transition to a low-carbon and resource-efficient economy.
  • On one hand, such a transition offers an opportunity to create new jobs. But on the other hand, it threatens to leave workers in some industries and communities behind. It is a similar dynamic to what we have seen in the rust-belting of former industrial areas in developed countries.
  • Our view is that companies alone are not ultimately fully responsible for “stranded workers and communities”[1] due to the shift to a low-carbon economy. The effort should be collective and include national governments and a range of stakeholders.
  • We note that climate change is not the only driver we see impacting workers’ prospects today. Other major types of transitions are currently happening, such as those driven by automation, for which we think companies have a similar - if not greater - responsible role to play as an employer.
  • Just transition overlaps with several of the United Nations Sustainable Development Goals (SDGs), in particular SDG 13 – Climate action and SDG 8 – Decent work and economic growth. Investors should consider this issue as part of its approach to climate change analysis and engagement.

The transition to a low-carbon energy and resource-efficient economy could have a profound effect not only on the climate – but also on millions of workers around the world. In fact, studies show[2] that almost half the global workforce could be affected by the move to a low-carbon society – creating a need for a ‘just transition’.

‘Just transition’ is the name given to an emerging concept taking into account the social impact on these workers and communities of transitioning to a low-carbon economy.

Switching to a low-carbon economy is expected to eventually have a positive impact on jobs which rely directly on healthy ecosystem services, mainly located in Africa and Asia Pacific[3]. The vast majority – 80% - of these jobs relate to agriculture, followed by food, drink and tobacco (6%), textiles (4%) and fishing (4%). However, while the overall net impact on jobs is expected to be positive, we shouldn’t forget the fate of the 1.47 billion[4] people working in industries contributing to environmental degradation - some of them also depending on the environment to thrive, e.g. agriculture, shown in the table below. For these people, there will be inevitable disruptions.

Figure 1. Global direct employment in sectors critical to climate stability

This corresponds to roughly 50% of the global workforce being potentially at risk from a green transition. Embarking on a fair transition ensures that these workers are considered. 

Just transition interlinks with several of the United Nations Sustainable Development Goals (SDGs), in particular SDG 13 – Climate action and SDG 8 – Decent work and economic growth.

Figure 2. Links between a Just transition and the UN SDGs


There are clear benefits to transitioning to a resource-efficient economy, but the transition we want to reach must be equitable. The 2015 Paris Agreement[5] states that parties should “tak[e] into account the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities”. This inclusion is largely the result of global trade unions’ hard work[6].

A recent paper[7] provides a useful framework for investors willing to insert the just transition at the heart of their climate strategy. It presents five areas where investors can act:

  • investment strategy
  • engagement with investee companies
  • capital allocation
  • public policy advocacy and partnership
  • learning and review

We believe that it is increasingly important for investors urging companies to embark on the climate transition to consider the potential social consequences of such a change. Our view is that while companies can play an important role in ensuring a smooth just transition, we don’t expect companies alone to carry the full responsibility for negative social impacts.

Climate-driven transition is not the only just transition facing companies and its investors. There is another major dynamic – digital and automation-driven transition. We consider this to be another area that should be taken into account in the concept of just transition.

What differentiates the green transition from other ongoing transitions?

The major difference between these ongoing transitions is what is triggering them.

The digital and automation transitions are the outcome of a natural evolution of the economy and technological progresses, in the same way the world experienced the agricultural and industrial revolutions. Businesses have quickly understood the importance of streamlining processes and embracing automation and digitalisation to augment productivity and grow revenues. Global GDP could be 14% higher thanks to artificial intelligence by 2030, according to PwC[9] .

However, the switch to a green economy has been propelled by a conjunction of forces in most cases outside of companies’ control or choice. The financial benefits are not so evident or tangible, and the efforts demanded were unfortunately not often deemed a business priority.

A huge number of workers will be impacted. Some are likely to lose their jobs – especially for workers in carbon-intensive industries and workers whose tasks are repetitive. But at the same time, other type of jobs and skills will spring up. In both cases, there will be an important race for key new competences indispensable to make the transition a success.

AXA IM believes that the concept of a just transition should be expanded to encompass other ongoing transitions. Questions around responsible restructuring, workers’ employability, workforce planning and decent work should be consistently asked, regardless of the nature of the transition. As digital transition has its roots in business’ own choice, and the primary goal is not to benefit society, we would expect companies to act responsibly when undergoing the transition. It is their choice, therefore their duty to insure workers are not left behind.

On the just transition, we question the ultimate responsibility. Businesses will have to unlock tremendous financial sums to switch their business models and/or build on energy efficient measures. Requiring them to fully support employees and communities in the transition can be a drag on their activity. This should be a joint-led effort between various stakeholders, first and foremost led by governments through national policies. We believe it doesn’t mean companies shouldn’t be relieved from accountability and it is key that investors broaden the green-only scope to consider social consequences of the transition. This is not only the right thing to do, it is also a question of maintaining business continuity. Companies that understand the criticality of a good social management will be better placed to benefit from the green transition in the future, in our view, in a context of green and digital skills shortage.

Engaging on the just transition: Key questions for business

There is no doubt the ‘greening’ of the economy is something that will benefit all of us in the long run, be it our planet or our people. The overall impact on jobs is expected to be positive. But the transition means also that some workers will be affected by the cards’ reshuffling across sectors and activities. There will be job creation and destruction as well as enforced occupational changes.

For example, in the energy sector, making the efforts to keep a temperature rise below 2°C by 2100 would create around 18 million net jobs in the energy sector by 2030 compared to a business as usual scenario. This is the result of 24 million jobs creation and six million losses[10]. A lot of these jobs that are created will require new skillsets, meaning that there should be systems in place to provide workers with the right competencies. A lot of the equivalent job destructions will call for governments to provide safety nets to these workers in transition, such as robust social protection systems, reorientation programs etc.

National policies towards a low-carbon economy will inevitably be one of the drivers for the development of green skills at country-level. Without skilled workers, the shift to a green economy will be compromised. The recent Climate Action for Jobs initiative aims to ensure a just transition and that decent and green jobs are part of all Nationally Determined Contributions (NDC). This is a positive step to maximize the likelihood of successfully achieving the transition to a green economy, in our view, especially as most of the NDC haven’t referred to the need for skill development[11]  yet.

Figure 3. Work and environmental sustainability dependencies for a low carbon transition

The just transition concept leads to two main challenges from an employer perspective, in our view. How do we take care of workers whose jobs are set to disappear? And how do we ensure we have enough green talents to make the transition towards a low-carbon economy a reality?

Answers and solutions will be different at country and business levels. But they will feed each other. If government should help workers affected by the transition, we also think there is a real incentive for companies to act in a responsible way and leverage on their existing talent pool – when feasible  –  rather than going through harmful social restructuring.

These are the main questions we would seek companies to answer:

- Climate strategies’ credibility: Is there a robust climate strategy in place with forward-looking targets? Does this strategy consider social impacts of the transition? Is it in line with the Taskforce on Climate-related Financial Disclosure’s requirements?
- Governance: Does the board of directors have sufficient expertise to assess the impacts of these strategic issues? Does it have systems in place to adequately oversee risks and opportunities?
- Collaboration: What discussions are taking place at the industry group level of sector peers, trade unions, investors and public entities on the topic of a just transition?
- Freedom of association: How are labour unions supported and empowered to consider this issue?
- Internal communication: What is the company’s position on communicating with employees on the risk of structural changes which may affect the company and its industry?
- Reorganisation and talent planning: Has the company considered assessing the share of current employees whose competencies are likely to be obsolete? In turn, what is the projected share/numbers of employees with new skills that will need to support the evolving business model?
- Employability and responsible restructuration. What consideration has there been for upskilling and reskilling existing employees, rather than hiring new staff? Is consideration given to inclusion of workers who are vulnerable to discrimination?

Next steps for investors to support a just transition

We recently became a signatory to the Statement of Commitment to Support a Just Transition on Climate Change. We are committed to participating in key working groups and sharing our experience from our investment and engagement activities to further advance the topic of the just transition. We are also a strong advocate of the Workforce Disclosure Initiative which encourages companies to promote SDG 8 on decent jobs for all through more social data disclosure, including training and workforce planning.

As investors, we have a role to play not only in engaging with companies, but also with climate scenario providers. There is a need for more social impact analysis to be integrated into the various set of climate scenarios available in the market. We would like these scenarios - which often serve as a basis for governments and companies to develop a consistent climate pathway - to push the boundaries to include social impacts.

We applaud the “Shared Socioeconomic Pathways” already used as input by the Intergovernmental Panel on Climate Change (IPCC). It is a sign that social modelling is increasingly considered in the IPCC assessments. These pathways illustrate more the evolution of societal and economic factors such as population and economic growth, education, urbanisation etc. in the absence of a climate policy. They don’t directly include the consequences of a green transition to workers and communities.

In our view, the IPCC and others must integrate the human factor upfront, rather than questioning the unwanted consequences of a transition which will be green, but unlikely to be fair to all.

AXA IM also commits to engage with climate scenario providers to integrate social aspects into their pathways.

By taking these steps, we hope that the millions of workers whose jobs will be affected by the transition to a low-carbon economy will be treated fairly and given new opportunities, allowing them to not only survive but to thrive.

Sources:

[1] Stranded workers is a concept echoing the one of “stranded assets”, e.g. “fossil fuel supply and generation resources which, at some time prior to the end of their economic life, are no longer able to earn an economic return, as a result of changes associated with the transition to a low-carbon economy”, Carbon Tracker

[2] Just Transition of the Workforce, and the Creation of Decent Work and Quality Jobs, UNFCCC, 2017

[3] International Labour Organization (ILO), 2014

[4] Just Transition of the Workforce, and the Creation of Decent Work and Quality Jobs, UNFCCC, 2017

[5] United Nations Paris Agreement, 2015

[6] See Just Transition: A report for the OECD, May 2017

[7] Climate change and the just transition: a guide for investor action, December 2018

[8] The variation mainly depends on the approach adopted - task-based versus occupation-based.

[9] Sizing the prize: What’s the real value of AI for your business and how can you capitalise? PwC, 2017

[10] ILO, Greening with jobs, 2018

[11] The NDC partnership Climate Watch

 

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