SAFE Working Paper No. 325

The Clash of ‘E’ and ‘S’ of ESG: Just Transition on the Path to Net Zero and the Implications for Sustainable Corporate Governance and Finance

Climate change is one of the highest-ranking issues on the political and social agenda. Corporations are one of the main actors that will play a major role in the decarbonisation of the economy. They need to put forward a net zero strategy and targets, transitioning to net-zero emissions by 2050. Yet, an important but rather overlooked stakeholder group in the sustainability debates can pose a significant stumbling block in this transition: employees. Although climate action has huge benefits by ameliorating adverse environmental events and is expected to have overall positive impact on employment, net zero transition in companies, especially in certain sectors (such as energy) and regions, will cause substantial adverse employment effects for the workforce, indicating a potential clash of environmental (E) and social (S) aspects of the ESG agenda. In other words, although the outlook is positive from a social welfare perspective, the net zero transition may not be utility maximising for some.


This will probably create stakeholder conflicts in companies where the green transition will mostly take place. If the labour has any countervailing power via corporate governance, contract, or labour laws, then this has the potential to slow down, or dilute, or even derail the necessary climate action in companies. In this regard, the concept of just transition has been promoted, which calls for a swift and decisive climate action in corporations while taking account of and mitigating adverse effects for their workforce. Although ‘just’ implies an equitable deal, actions in the name of just transition can be no more than a Coasian bargain between the company (and shareholders) and the labour.


Potential stakeholder conflicts and their ramifications for the pace and shape of the net zero transition offer a few initial observations regarding the corporate governance and finance initiatives and debate, especially for directors’ duties & executive remuneration, sustainability disclosures, institutional investors’ engagement, and green finance.