How to combine business with a just transition

February 15, 2024

An increasingly popular theme internationally is that of the green and just transition. This is due to a greater awareness of the climate crisis, concerns about poverty and social inequalities exacerbated by environmental degradation and climate changes, concern for workers in sectors that may be most affected by the transition, political momentum around environmental sustainability and social justice issues, greater corporate engagement, with growing recognition of the need to transition to more sustainable and socially responsible business practices, and the recognition that climate change agendas and SDGs can combine and reinforce each other.

According to the UN, the concept of the green and just transition seeks to ensure that no one will be left behind in the transition to low-carbon and ecologically sustainable economies and societies. However, despite its appeal and reasonableness, the concept is controversial. Various groups, each with their own reasons and motivations, oppose it. These include industries that heavily depend on fossil fuels or unsustainable practices, such as coal mining, oil and gas extraction, and heavy manufacturing, movements representing workers in carbon-intensive industries, groups and shareholders that prioritize immediate profits, countries that benefit from the export of fossil fuels, and individuals or groups that deny the scientific consensus on climate changes. In the United States, for example, companies that have adopted ESG principles are experiencing potent negative lobbying from conservative groups, and the just transition is even a topic of electoral campaigns.

But evidence suggests that the green and just transition is not antagonistic to business interests. On the contrary, transitioning to sustainable practices opens up new business opportunities. Companies that embrace sustainability can tap into emerging and growing markets to gain a competitive edge. The adoption of sustainable practices often leads to operational savings in the medium and long term, such as in energy efficiency, waste reduction, and resource conservation. By embracing sustainability, value is created, and innovation and differentiation in the market are promoted, such as in green technologies, sustainable materials, and circular business models. Demonstrating a commitment to sustainability can also improve the company's reputation and brand value with the market and its own employees. By proactively addressing ecological concerns and complying with social and environmental regulations, the company can also avoid fines, legal disputes, and reputation damage. And empirical evidence suggests that companies that demonstrate a commitment to environmental and social responsibility have greater and better access to capital and credit conditions, experience a greater increase in market share, and are more resilient.

However, it is necessary to recognize that the interests of companies in the green and just transition agenda may be influenced by the specific conditions of each country. After all, the conditions faced by the same company in a developed and a developing country to carry out that agenda can be quite distinct. And it is also necessary to recognize that the rising wave of nationalism, discrimination, protectionism, and subsidies offered by developed countries to their companies and the fragmentation of global trade impose asymmetrical costs and disadvantages for companies operating from developing countries, creating obstacles for the adoption of the green and just transition in those contexts.

Despite the difficulties, the case of Latin America is illustrative of how companies can seize business opportunities and combine attractive returns with the green and just transition. After all, the region offers unprecedented conditions for domestic and international companies to explore the economy of the future and thrive. Consider green energy and powershoring. The region has, by far, the greenest electricity matrix, and many new renewable energy projects and transmission lines are underway. Besides the immediate availability, the cost of that energy is generally competitive, enhancing the region's attractiveness for energy-intensive businesses or those needing to decarbonize in short timelines. The region is also generally abundant in fresh water and strategic minerals for the transition, is especially rich in biodiversity, has immense potential for the carbon market, immense leadership and potential in biofuel production, and enormous potential for the expansion of sustainable agriculture. All this favors the competitiveness of energy and water-intensive products.

For example, consider green steel. The region is globally the most competitive to host the production of this product, which can have significant implications for job and income generation, territorial development and value chains, infrastructure, impact on small businesses, tax generation, and exports, among many other benefits converging with the green and just transition in developing countries. But that steel can also benefit companies from other regions needing to decarbonize their production lines, like the vehicle industry, favor international consumers with more competitive prices, and accelerate times and reduce the cost of the energy transition in the steel-importing countries. Ultimately, that steel could favor the green and just transition on a generalized plan.

Stimulating and promoting the combination of commercial, social, and environmental interests could accelerate measures and reforms favoring environmental commitments and the SDGs, placing the private sector in a very special condition. Stimulating trade and investment, ending subsidies from rich countries, and accessing technologies and financing sources could be particularly relevant to engage companies in developing countries in this important global interest agenda.

Jorge Arbache
Jorge Arbache

Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-