Pursuing a Just Transition on the Path to Net Zero

A just transition

Thousands of companies now embrace this fact and publicize their strategies to adapt and stay competitive in a net-zero economy. According to CDP, the global non-profit that runs the world’s environmental disclosure system, in 2022 more than 4,000 companies disclosed that they had a climate transition plan. However, there is a wide range in the quality of disclosures and most companies fall short on a crucial element: they do not adequately describe the impact of transition activities on workers, customers, contractors, communities and other key stakeholders. Put another way, they do not demonstrate if and how they will pursue a just transition, which refers to the process of decarbonizing the economy in a way that is fair, equitable and inclusive, and that accounts for the socioeconomic impacts of transition activities on workers, communities and other stakeholder groups.

This omission forces one to question the underlying credibility of many corporate climate transition plans, as stakeholder cooperation is integral to strategy execution and risk management. As demonstrated in various examples, failure to account for the potential negative impacts on workers and communities can create backlash, disruptions and costly consequences for companies undergoing transition. For example, when Entergy Corporation announced the closing of two coal plants in Arkansas in November 2018, the Arkansas Attorney General petitioned a federal court to intervene and halt the plans, which were not approved by a U.S. district judge until March 2021. (See “Judge approves Entergy Arkansas, Sierra Club agreement to retire coal, natural gas power plants.” The box below notes a couple of other examples.)

There is clearly a big difference between making a pledge to reduce emissions and implementing the changes needed to fulfill those pledges. Whether it’s a power company retiring a coal plant or a car manufacturer converting to electric vehicle production, to execute transition plans effectively, it is vital that companies anticipate challenges to implementation and recognize the impacts on a wide range of stakeholders, including workers and communities.

Investors’ role

Institutional investors with trillions of assets emphasize that this area has not been given sufficient attention, and beyond urging companies to publicly acknowledge the impacts, are calling on companies to:

• Commit to a just and equitable transition.
• Establish oversight, management and reporting structures for just transition activities.
• Proactively engage workers, unions and local community leaders in transition planning activities.

A Statement of Investor Commitment to Support a Just Transition on Climate Change has been signed by 161 investors.

At the core of this call to action is an emphasis on the financial implications, as investors may be exposed to increased financial risks if portfolio companies fail to manage materially important operational, legal, regulatory and reputational challenges.

At Segal Marco, we believe that any climate transition plan should also account for the impact on workers, communities and other key stakeholders. Further, we believe companies that develop a process to include stakeholders in transition-planning activities will be more successful by building effective long-term relationships with workers, customers, contractors, suppliers, government agencies and local community leaders. Businesses depend on these groups to run profitably and smoothly and create sustainable returns for shareholders.

As companies transform their operations to thrive in a low-carbon economy, they have a vested interest in being transparent about their objectives, bringing stakeholders to the table to help develop transition plans and leveraging those conversations and relationships to gain a competitive edge. Moreover, developing a robust, inclusive, well-structured just transition strategy is an opportunity that companies can seize to stand above their peers, strengthen their stakeholder partnerships and increase their long-term resilience.