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.