The importance of aligning with the Paris Agreement to help limit global heating is widely understood, but few realise that considering the social impact of the net-zero transition is part of this. Yet the sweeping systemic change needed to address the climate crisis will only be achieved by ensuring that those most negatively affected are helped to transition too – perhaps through financial support for reskilling or relocating.
The 2015 Paris Agreement acknowledged that transitioning to a low carbon economy would have a profound impact on workers, their families and certain communities, especially in the energy and transportation sectors. But although signatories were urged to consider creating decent work and quality jobs as part of a just transition, the financial support for this has been lacking. To address this, a Just Transition Declaration1 was signed by 16 governments at COP26 to ensure that no one is left behind.
What does a just transition look like?
How can investors assess whether companies are doing enough to mitigate the social impacts of the low carbon transition, and what does good look like? This is an emerging field, but we have seen some attempts to build frameworks. For example, the International Labour Organization (ILO) published its just transition guidelines in September 2015, setting out standards for governments and social partners.
In November 2021, the World Benchmarking Alliance launched a Just Transition Assessment2 based on these ILO guidelines, targeting 180 oil and gas, utility and automotive companies. However, only 17 companies scored more than eight points out of a maximum of 16, with UK energy utility SSE leading the pack. Most of those assessed failed to demonstrate that their climate transition plans had considered workers and other affected stakeholders. The people most at risk were being left out of the decisions that affected their future.
Collaborative engagement initiative Climate Action 100+ has also begun collecting data on the just transition. However, it is difficult to assess how effective a company’s plan will be at mitigating the worst impacts. As the physical impacts of global heating become increasingly apparent, businesses will have to make hard choices about stranded assets, reacting quickly to a changing policy environment when governments are inevitably forced to pivot.
We saw how companies had to wrestle with similarly difficult trade-offs during the pandemic. Should they lay off workers while continuing to pay shareholder dividends and service debt? Or should they continue to invest in their employees, so that they could ramp up rapidly post-pandemic? We are seeing the outcomes of these decisions now as some companies and sectors emerge stronger while others continue to struggle.
Engaging for a just transition
Federated Hermes Limited was a signatory to the PRI’s 2018 just transition statement,3 and at EOS we engage with banks, miners, car makers and utility companies on their just transition strategies. We believe company plans should address worker and supply chain impacts, incorporate a platform for social dialogue, and dedicate resources to job retraining and relocation.
For example, we engaged with the US utility American Electric Power (AEP), asking for the disclosure of a clear just transition plan as it retires some assets, an assessment of the impact on the workforce, and a timeline to complete the transition. We were impressed by the company’s detailed just transition section within its 2021 Climate Impact Analysis report.
The company has formed a special transition taskforce and partnered with a local NGO, the Just Transition Fund, to facilitate a dialogue for the retirement of the coal-fired Pirkey Power Plant. It has helped 75% of the workers in the plant to move to other positions, either with or outside the company, or to retire with the plant. We will continue to engage with the company on its just transition plans for retiring additional coal plants and on its assessment of potential unintended social consequences in the supply chain.