Companies and just transition in Europe: how public policy can energise private action

Published on November 29, 2023
Oleksandra Plyska, Rob Macquarie

Private companies can be engines for transformation to achieve climate and social equity goals. But to close gaps related to stakeholder engagement, training and equitable policies in the workplace, and human rights due diligence – and to promote speed and direction – public decision-makers can and should integrate just transition principles into regulation and procurement policies, write Rob Macquarie and Oleksandra Plyska.

Prominence of the just transition in the EU’s Green Deal and attention to the need to protect vulnerable citizens during the energy crisis have raised the profile of just transition across Europe. For instance, in 2021 the European Commission published a ‘toolbox for action and support’ to tackle rising energy prices. This year, EU legislation created a Social Climate Fund to minimise the impact of a carbon price on greenhouse gases in buildings and transport (implemented by an expansion of the EU Emissions Trading System), which will directly impact people’s cost of living.

Private finance and corporate investment are essential for climate neutrality and resilience across the whole economy. Since many companies now have net zero targets in place, focus has shifted from target-setting to implementation and monitoring progress. Initiatives like the UN High-Level Expert Group highlight that integrity in pursuit of net zero means setting credible and transparent plans with interim targets, clear actions and regular reporting. And both major investors (like Norway’s State Pension Fund) and public authorities increasingly expect companies to disclose their climate transition plans.

The just transition imperative

Transition plans need to be made just. A first step should be to anchor them in the principles of a just transition established by the International Labour Organization (ILO). Businesses and financial institutions should collaborate with workers, consumers and other stakeholders to develop their plans, and be attentive to the distribution of risks and opportunities for workers, suppliers, communities and consumers associated with planned actions. For example, approaches to recruitment and training should empower underrepresented groups, including women or people from minority backgrounds, to gain from opportunities. Doing so will contribute to the transition’s success and inclusiveness.

The business case for just transition action is increasingly evident. Benefits include investing in the skills needed to deliver forward-looking strategies, thereby making the workforce more productive and maintaining employee retention and reducing legal, reputational, market and technology risks in the long term. Moreover, companies can gain increased access to finance, as a growing number of investors include social risk assessments as part of their due diligence processes. Conversely, companies that do little may become misaligned with human rights expectations, including rights at work, and risk losing their social licence to operate.

Yet most companies with high emissions are lagging behind on just transition planning and implementation, as the World Benchmarking Alliance (WBA) suggests. For example, although 40% of the 320 assessed companies in high emitting sectors show some of the measures for green job creation, less than 1% are planning effectively for a just transition. Another recent assessment of the world’s largest polluters conducted by the investor-led initiative Climate Action 100+ also notes a shortfall, highlighting a gap in stakeholder dialogue in particular. While firms generally tend to improve on their environmental disclosures, none of the companies reviewed scored highly on the just transition indicator. Among 170 companies evaluated, 10% have a just transition plan and only five companies developed their plans in consultation with key stakeholders.

The public–private nexus on just transition

Despite intensifying efforts by investor, industry and civil society groups to promote best practice, private companies are not moving fast enough in any sector or industry. Public action is needed to shift progress up a gear.

Governments can think about the just transition in terms of a ‘policy cycle’, from planning and analysis through public and stakeholder participation, policy design for redistribution, implementation and accountability, and monitoring and evaluation. LSE and other research institutions around Europe recently published a framework for national policy on just transition, with a wide range of approaches for policymakers to use across this cycle.

The goal of decarbonising the entire economy means thinking in terms of multiple sectors and the many overlapping roles people play within them. For example, an individual might be a consumer of energy and food, a worker in industry, and a member of a local community affected by redevelopment of the transport network. To address this wide scope and respond to the place-based and contextual nature of a just transition, governments should use private companies and financial institutions as a delivery partner, alongside local and regional governments, unions and communities.

Government policy can set the direction for purposeful change across the economy. A recent policy briefco-produced by LSE with WBA highlights several policy tools to enable faster corporate action on just transition, including establishing social dialogue and tripartite mechanisms, upskilling and retraining schemes, social protection, public procurement and fiscal policy. An overarching participatory approach with social partners, such as business member organisations and labour unions, is crucial. However, here we focus on regulation and public procurement as a bedrock for catalysing private action.

An emerging regulatory landscape

Across Europe, there are several opportunities for action and bright spots for potential progress.

1. Direct requirements to align with just transition

Policymakers can use direct regulation to rebalance companies’ decision-making towards stronger just transition action. For instance, under ‘co-determination’ in Germany, all companies are required to include seats for workers on governance boards, with especially strong requirements for those in the coal, iron and steel industries. This policy norm promotes equal participation of shareholders and employees in company decisions, from how to invest profits to issues around overtime pay, layoffs and performance monitoring.

A weaker option, but one that still requires action, is mandatory due diligence on social and environmental sustainability. Under proposals for the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), large companies in the EU would be required to publish transition plans, including “how the company’s business model and strategy take account of the interests of the company’s affected stakeholders and of the impacts of the company on climate change”, and conduct human rights and environmental due diligence. However, the CSDDD does not mention just transition explicitly; doing so would have set a stronger precedent for anchoring further measures in this overarching concept. (Note that negotiations on the Directive between the European Commission, Council of the European Union and European Parliament are ongoing.)

2. Improving company disclosure on just transition

Supportive disclosure requirements are needed to back up due diligence and transition planning by making sure that companies are transparent about their plans and activities. In the EU, the Corporate Sustainability Reporting Directive (CSRD) will work in tandem with the CSDDD and will require better reporting from large companies. Additionally, the European Financial Reporting Advisory Group has incorporated mentions of just transition into the draft European Sustainability Reporting Standards, designed for reporting on a company’s workforce.

The UK Transition Plan Taskforce’s Disclosure Framework offers a good point of comparison for widening the scope of planning to cover just transition. Stakeholder engagement and the impacts of transition activities on society (e.g. through human rights) are among other topics for companies to include in reporting on their climate plans. The Taskforce established a working group on just transition to achieve this. Although not yet mandatory, UK regulators will undertake consultations that could move the Taskforce’s framework in this direction.

3. Green and social public finance and procurement

Beyond regulation, policymakers can use public finance as an incentive for companies to improve their reporting and make substantive progress. For example, Spain’s Just Transition Programme uses ‘just transition tenders’ to award grid access permits to renewable energy developers in mining regions affected by the closure of coal-fired power plants. The tenders prioritise projects that maximise environmental and socioeconomic benefits (such as creating employment, especially for women or affected coal sector workers).

Other countries seeking to develop procurement rules for a just transition could build on the EU’s guidance for Socially Responsible Public Procurement, which seeks to ensure that purchasing decisions incentivise decent work, accessibility, and social, labour and human rights. There are also examples from other regions, such as Latin America. These should be integrated with green public procurement (GPP). The Industrial Deep Decarbonisation Initiative has produced guidance and a roadmap for GPP for the steel and aluminium sectors, which could be extended to others.

The just transition ambition loop

There is a great deal of work ahead and new laws and regulations will not bite for some time. For EU regulations to take effect, Member States must translate Directives into national law. In the UK, regulators will hold further consultations before the TPT Disclosure Framework might become a requirement. However, even the signal of future regulation to come can be a strong incentive for private action.

Meanwhile, private sector initiatives should continue apace. By preparing high-integrity frameworks and approaches for policymakers to customise and adopt, non-state actors and coalitions can fast-track policy improvements in an ‘ambition loop’. In Europe at least, just transition is cruising down the ‘road to regulation’ called for at COP27, for the good of both climate and society.

The authors would like to thank Antonina Scheer and Brendan Curran for their comments on an earlier draft. The views in this commentary are those of the authors and do not necessarily represent those of the Grantham Research Institute.

This commentary was co-published with EUROPP.