How can we reconcile environmental challenges with social impact?

To cope with cli­mate change, and adapt our eco­nom­ies and soci­et­ies to the chal­lenges it presents, we need to make a trans­ition. How can we make this trans­ition as fair as pos­sible? For the Inter­na­tion­al Labour Organ­iz­a­tion, a just trans­ition means “mak­ing the eco­nomy green­er in a way that is as equit­able and inclus­ive as pos­sible for all con­cerned, cre­at­ing oppor­tun­it­ies for decent work and leav­ing no one behind”. This same idea of a just trans­ition already fea­tured in the 2015 Par­is Agreement.

The cur­rent situ­ation makes this chal­lenge all the more dif­fi­cult, giv­en the con­sequences of the Cov­id-19 pan­dem­ic, the eco­nom­ic impact of the war in Ukraine and rising infla­tion. It is essen­tial to carry out an in-depth review of the struc­ture of our eco­nomy, without increas­ing inequal­it­ies, but also without slow­ing down invest­ment in the energy trans­ition. And yet, a pro­found trans­ition auto­mat­ic­ally implies pro­found changes, and there­fore the cre­ation and destruc­tion of activ­ity in mul­tiple sec­tors, as well as social impacts that are dif­fi­cult to predict.

To meet the chal­lenge of a just trans­ition, non-fin­an­cial ESG (Envir­on­ment­al, Social and Gov­ernance) cri­ter­ia can play an import­ant role. They offer a clear out­line for the efforts of eco­nom­ic play­ers, the fin­an­cial sec­tor and com­pan­ies to ques­tion their prac­tices and strategies. From Janu­ary 2024, new European rules will be intro­duced to provide bet­ter inform­a­tion on com­pan­ies’ envir­on­ment­al impact. They will have to provide more data on the pol­lu­tion gen­er­ated by their activ­ity, their use of mar­ine resources or the actions imple­men­ted to move towards a cir­cu­lar eco­nomy. The new meas­ures also aim to increase trans­par­ency for ESG rat­ing providers.

At present, ESG per­form­ance rat­ings vary from one agency to anoth­er, and this can pose a prob­lem for the devel­op­ment of sus­tain­able fin­ance. Stand­ard­isa­tion of ESG inform­a­tion would make it pos­sible to recon­cile envir­on­ment­al and social issues in a peri­od of energy trans­ition. How­ever, for a trans­ition to be just, we face two chal­lenges. The first is “dis­tributive justice”. The trans­ition to a low-car­bon eco­nomy will not affect all sec­tors, regions, and pop­u­la­tions in the same way or with the same intens­ity. Indeed, some sec­tors or regions are more depend­ent on fossil fuels, pol­lut­ing indus­tries, or nat­ur­al resources.

How can ESG stand­ards play a role in this? By con­sid­er­ing rel­ev­ant eco­nom­ic and social cri­ter­ia, and not just the level of employ­ment in those areas or sec­tions of the pop­u­la­tion that are par­tic­u­larly vul­ner­able to the energy trans­ition. This would involve, for example, using social and envir­on­ment­al per­form­ance data sup­plied by extra-fin­an­cial rat­ing agen­cies, prac­tice data sup­plied by offi­cial stat­ist­ics sur­veys, or exper­i­ment­al data sup­plied by sci­ent­ists. ESG stand­ard­iz­a­tion must take account of this “dis­tributive justice” issue, which also means reflect­ing poten­tial con­flicts or arbit­ra­tions that may arise with­in the company.

A second chal­lenge to be con­sidered if we are to make a just trans­ition is dir­ectly linked to the issue of gov­ernance. Not all the stake­hold­ers affected by this trans­ition have the same capa­city to influ­ence or the same decision-mak­ing power over their imme­di­ate envir­on­ment, par­tic­u­larly with­in the com­pany. So how can we meet this chal­lenge of “pro­ced­ur­al justice” and give all stake­hold­ers an act­ive role? Com­pan­ies can include employ­ees in stra­tegic decision-mak­ing, and in the integ­ra­tion of envir­on­ment­al and social objectives.

Employ­ee par­ti­cip­a­tion in cor­por­ate gov­ernance appears to have a pos­it­ive impact on com­pany res­ults, both in terms of fin­an­cial and non-fin­an­cial per­form­ance. Pro­ductiv­ity and the num­ber of pat­ents filed increase when employ­ees are present on their company’s board of dir­ect­ors, accord­ing to the research. In addi­tion, oth­er employ­ees are more motiv­ated, and identi­fy more closely with the company’s object­ives. As part of a just trans­ition, it’s not just a ques­tion of rely­ing on the mere pres­ence of employ­ees at the heart of the decision-mak­ing pro­cess, but also of estab­lish­ing trans­par­ency, mak­ing eco­nom­ic inform­a­tion access­ible, and encour­aging dia­logue between man­age­ment and social partners.

Look­ing bey­ond employ­ees, there is a case for tak­ing action with regard to the remu­ner­a­tion of com­pany dir­ect­ors to ensure that envir­on­ment­al and social issues are prop­erly taken into account. The French Prime Min­is­ter men­tioned this in her policy speech in July 2022. “The heads of major com­pan­ies must set an example, and their pay will be tied to the extent to which envir­on­ment­al tar­gets are met”, Élisa­beth Borne told MPs.

The debate on index­ing exec­ut­ive pay to envir­on­ment­al, as well as social, cri­ter­ia is alive and well in many coun­tries. In August 2022, the Amer­ic­an com­pany Mas­ter­card announced that bonuses for all its employ­ees would be cal­cu­lated on the basis of ESG object­ives, includ­ing reduc­tions in CO₂ emis­sions, fin­an­cial inclu­sion and a reduc­tion in the gender pay gap. Two years earli­er, in Ger­many, BMW announced that the remu­ner­a­tion of its board of dir­ect­ors would depend in part on meet­ing its tar­gets for redu­cing CO₂ emissions.

What do we know about the effect­ive­ness of this type of meas­ure? The impact of these ESG bonuses dif­fers widely depend­ing on the company’s gov­ernance mod­el. When gov­ernance is share­hold­er-ori­ented, we see a reduc­tion in fin­an­cial per­form­ance on the one hand, and only a rel­at­ive gain in CSR per­form­ance on the oth­er. Con­versely, if gov­ernance is geared towards employ­ees, for example, there is an improve­ment in non-fin­an­cial per­form­ance. ESG stand­ard­isa­tion can be a sol­id found­a­tion for achiev­ing a just trans­ition, but to be effect­ive, it needs to incor­por­ate com­plex issues in the inter­ac­tion between envir­on­ment­al and social dimen­sions of a dis­tributive nature and governance.

Sirine Azouaoui

Fur­ther reading

Crifo, P. 2023. Normes ESG et trans­ition juste : com­ment pren­dre en compte sim­ul­tané­ment les enjeux environ­nemen­taux et soci­aux ? Revue Ser­vir, Fév­ri­er-Mars 2023 / n°520, 16–20.