The ‘S’ in ESG is critical in a just energy transition

Businesses are seeing an increased focus on the “social” aspect of the environmental, social and governance (ESG) agenda. Almost half (49 percent) of the 250 largest global companies by revenue acknowledge social elements as a risk to their business. So while the “S” may not get as much attention as the other two components of ESG, it’s becoming increasingly critical — especially when considering the intersection of the environmental and social aspect within a just energy transition.

There are several reasons why the “S” in ESG is critical for a just energy transition. A just energy transition is fair, ensuring no one is left behind and all communities can thrive. This transition focuses on managing the social aspects of climate change in the workplace and wider community in a way that allows for rapid decarbonization enabled by inclusive decision making and resulting in resilient growth. It provides economic opportunities for all countries, including developing ones.

The shift to renewable energy sources can create new industries and jobs and reduce reliance on fossil fuels. For example, the International Renewable Energy Agency estimates that Africa’s energy sector could create up to 28 million jobs by 2050, of which 22 million would be transition related. A just energy transition gives countries the chance to diversify their economies and create new sources of income and employment.

But climate change affects different groups of people in different ways. Often, the poorest and most marginalized populations — those least responsible for climate change — are the most affected by it. Some of the most vulnerable individuals are also being excluded from the opportunities associated with achieving net zero, further exacerbating potential inequalities.

A just energy transition requires swift and decisive climate action from businesses, taking into account and mitigating negative effects on the workforce. As the transition to renewable energy sources will lead to job displacement from high-carbon to low-carbon industries, it’s important that these job losses are managed fairly. Workers should be given the necessary support and training to transition to new industries, such as retraining programs and job placement services. Not only is this the right thing to do from a societal perspective, in a tight labor market, with skills shortages in renewables, it’s also the right thing to do from a business perspective.

There’s a strong connection between net zero and inclusion, diversity and equity (IDE). To succeed, business needs to engage the broadest possible talent pool to tackle the large volume of work that lies ahead, and to embed different ideas and innovate ways of thinking. This should include those who have been underrepresented in the past in business, government and other organizations, particularly at the senior leadership level. In fact, 82 percent of business leaders in the Leaders 2050 network’s Diversity for Net Zero survey said IDE is essential for achieving net zero most effectively. Therefore, the world must embrace differences and support diversity of thought to drive the innovation needed to reach net zero.

Finally, society must work with those most affected to understand potential challenges and find solutions that work best for them, whilst limiting further inequalities.

The transition to renewable energy sources also provides businesses an opportunity to do things differently to improve the impact they have on the communities they serve. This could include prioritizing the development of renewable energy technologies that are more accessible and affordable for all communities, as well as ensuring that the benefits of the transition are shared fairly. For example, some countries and territories have implemented policies that require a certain percentage of the jobs created by the renewable energy sector to be reserved for disadvantaged or marginalized communities.

Businesses can also improve their social performance by investing in their employees and communities and working with suppliers to drive sustainability.

Just transition plans and strategies should be developed through constructive social dialogue with stakeholders, including workers, unions and communities. It’s important to ensure all aspects of society — including gender and class — are well represented. This kind of engagement can lead to sustainable and mutually beneficial outcomes as businesses transition in a way in which stakeholders feel engaged in the planning process — potentially increasing buy-in.

Businesses can’t make a just transition happen on their own. They should also work with other public stakeholders, including governments, toward this goal. While it’s important for businesses to proactively increase awareness of impacts across the value chain, it’s also important to ensure transition plans are built from the bottom up through active social dialogue and stakeholder engagement.

Finally, the “G” in ESG — governance — will be an enabling factor that helps prioritize the “S”. Good governance is essential for making sure the transition to renewables is fair and equitable, and that all stakeholders are able to participate in making decisions. This could include involving communities and civil society organizations in the development of renewable energy projects, as well as the implementation of policies and regulations that ensure the transition is transparent and accountable.

Businesses should also recognize their ability to influence behavior change. Engaging organizations outside of their business, such as think tanks and NGOs, can, if chosen carefully, foster diversity of decision making. Individuals in these organizations may act as role models, ultimately making the net-zero transition more accessible to different societal groups.

A just transition is crucial for a fair shift to a low-carbon and resilient economy at the necessary scale and pace to avoid catastrophic climate damage — and ensures that no one is left behind. It creates economic opportunities and allows for an efficient and equitable transition to net zero.

But it’s important to move forward with progress, as stakeholder scrutiny is likely to increase. The recent KPMG CEO Outlook found that 68 percent of global CEOs believe progress on IDE has been too slow in the business world, and 73 percent think scrutiny of IDE performance will continue to increase over the next three years. Companies that meet rising social expectations will attract and retain talent, generate business opportunities and improve their reputations — while those who fail to adapt may struggle to compete in new low-carbon world.