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How can we reconcile environmental challenges with social impact?

Patricia Crifo
Patricia Crifo
Professor of Economics at École Polytechnique (IP Paris), Researcher at CREST (CNRS) and Associate Researcher at CIRANO
Key takeaways
  • To meet the challenges presented by climate change, we need a socially responsible transition.
  • This transition must not have a negative impact on the most vulnerable sectors and populations.
  • Non-financial ESG criteria can be effective levers of transformation to reconcile environmental and social issues.
  • Means of action such as employee participation in corporate governance or the indexation of executive salaries appear to have an overall positive 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.

Taking into account relevant economic and social criteria

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.

Giving an active role to all stakeholders

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.

Pay indexed to environmental objectives

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.

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