Why a just transition is everyone’s business
· 7 min read
This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.
Our global economy is shifting, with increasingly complex dynamics emerging from the need to reduce the impacts of climate change and meet decarbonisation goals. For instance, physical climate risks such as flooding and excessive heat require business adaptation, impacting CapEx and OpEx decisions and affecting insurance.
This unprecedented economic change is already proving to be significantly disruptive, creating transition risks, both from the changing economic and social conditions and from the impact of new regulations and potential consequences of failure to adhere to their requirements.
According to BlackRock, this disruption will mean that ‘economies will be reshaped as carbon emissions are cut. The transition will involve a massive reallocation of resources. Supply and demand will shift, with mismatches along the way. Value will be created and destroyed across companies’. [1]
Transitioning, however, presents not only risks but also significant potential benefits for organisations that act early. Among the key opportunities that can be unlocked are alternative sources of finance for operations and incentives to future-proof businesses through appropriate adjustments to emerging conditions.
Crucially, how this transition is managed matters. Without deliberate action, especially from businesses, the costs of change risks a disproportionate burden on workers, communities and vulnerable groups. This makes the case for embedding the just transition considerations at the heart of climate and financial decision-making.
Efforts to mitigate and adapt to climate change inherently entail a myriad of social implications, as they occur amid sweeping changes across all aspects of value chains. H&M Group recently stated that ‘moving towards net-zero and becoming a circular business will impact people and communities along our value chain in different ways , demonstrating the materiality of social aspects of transitions to business planning [2].
These social impacts range from job losses and reductions in job quality to numerous human rights considerations, including those affecting indigenous peoples and land use. Re-skilling also represents a significant concern, with workers from high-carbon industries facing knowledge and opportunity gaps in finding alternative work in transition-aligned sectors.
Research from Climate Horizon on the global trends and regional perspectives of ‘just transition’ initiatives identified this in the ‘transitioning in and out’ dynamic, in which there is an ongoing transition into climate-aligned sectors and transition out of non-aligned activities, engaging with stakeholders on the corresponding labour implications [3].
The term ‘just transition’ has emerged in response to the complex challenges and risks different groups face during this shift, particularly in low- and middle-income countries. The Institute for Human Rights and Business (IHRB) and Just Transition Finance Lab (JTFL) describe just transitions as reflecting the ‘strategies needed to ensure that climate action maximises social benefits (for example, for workers and communities) while also actively managing the social risks of transitions’ [4].
Such strategies can make use of such tools as specialised platforms for just transition-related resources [5], risk identification and finance toolkits [6], as well as reporting standards and guidance such as already discussed from the GRI [7] - all directed at mitigating social risks and including stakeholder considerations in transition activities, along with promoting rigorous disclosures that can build investor confidence.
In this context of critical transition actions with significant social implications, the importance of embedding just transition principles into business transition planning becomes clear.
The risks for businesses of not doing this are significant, including leaving organisations without access to competitive finance. In fact, in terms of accessing finance, 39% of sustainable initiative investors would refuse to invest in projects involving human rights risks [8].
Attention from voluntary standards such as the Global Reporting Initiative (GRI) - which states that ‘organisations… need to implement … transition plans’ – further demonstrates the significant risk for companies and organisations seeking finance, as investors increasingly seek plans incorporating just transition components and assess them using frameworks and standards such as the GRI [9].
Just transition planning can further help to mitigate the risks of social backlash against decarbonisation or transition measures, for example, from workers in high-carbon assets who would otherwise face redundancy [10]. This highlights one of the pivotal considerations in just transitions – namely that a failure to transition to a low-carbon economy without the principles of inclusion, agency and accountability risks leaving behind critical stakeholders, which in turn represents a significant risk to business and organisations in their transitions.
However, just transitions represent not only risk mitigation for businesses, but also a significant potential advantage.
From a workforce engagement perspective, companies that engage in dialogue with stakeholders in their workforce are, on average, 23% more profitable than their peers [11]. Moreover, integrating just transition principles [12] and a human-centred business model (HCBM) [13] can support the attraction and retention of diverse talent in a market where 70% of Gen Z and Millennials (representing 74% of the workforce by 2030), consider a company’s environment and social record before joining [14]. Failure to address these aspects could result in significant talent shortages and reduced competitiveness moving forward.
As already identified, when assessing investments, finance providers also frequently look at workforce and value chain engagement using transition plan disclosures as an indicator of the long-term viability of that company, representing the ability of the company to attract and retain talent in the medium- to long-term, as well as reputational considerations. As such, clear transition planning with the inclusion of a just transition lens can help to increase investor confidence in a company’s long-term viability through clear identification and communication of social risks and mitigation actions [15].
Just transitions represent a stakeholder-centric approach to transition planning. There are significant risks associated with not including just transition principles in transition planning, including reputational, financial and regulatory impacts. However, alongside these risks, just transitions also bring significant potential benefits. These include access to alternative finance, reputational benefits, value chain benefits, and workforce benefits.
There is no one-size-fits-all solution; organisations need to decide their just transition strategy based on where they are and where they want to be. Acting early and with determination can not only help them survive but also help them thrive in the economy of tomorrow.
The next article on values-based and ethical finance explores how purpose-driven capital can help translate just transition principles into practical financial solutions.
To know more, watch Climate Horizons video on Just transition: https://www.youtube.com/watch?v=usDU0cdze6U
The views expressed are for informational purposes only and do not constitute financial, legal, or investment advice.
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