Faculty of law blogs / UNIVERSITY OF OXFORD

Old Wine in a New Bottle: Stakeholder Conflicts in Green Transition


Alperen Afşin Gözlügöl
Assistant Professor, Leibniz Institute for Financial Research SAFE, Frankfurt


Time to read

5 Minutes

Climate change mitigation is one of the highest-ranking issues on the political agenda. On the macro level, the net-zero transition is expected to have an overall positive impact on growth and employment although models differ in their assumptions and results (UN, 2020; ILO, 2018; OECD, 2017). Therefore, the outlook is positive from a social welfare perspective. However, on the micro level, the net-zero transition may not be utility-maximizing for some. This is especially the case for labour. Significant adverse employment effects are expected in certain regions and sectors, such as energy, at least in the short-term. Furthermore, contrary to what the models assume, jobs created in the green economy may not offset these job losses due to labour market frictions (Banerjee and Duflo, 2019).

In a recent paper and accompanying projects, I examine the potential conflict of the current environmental agenda with social (employment) aspects and the potential implications of this conflict for the decarbonization of the economy, especially at the company level.

Corporations are the main contributors to climate change and therefore urged to undertake swift and decisive climate action, putting in place net-zero transition plans and targets. This, however, if history is any indication, is quite unlikely to happen without stakeholder conflicts. Past experiences show that environmental concerns and labour interests are not always reconcilable, and that worker-oriented governance does not always produce best results for the environment (eg the Volkswagen diesel scandal; see Armour, 2016; Gelter, 2016). Shareholders’ interests will also be largely aligned with green transition, especially if the transition risk is acute, in terms of long-term value creation for the company (see Krueger and others, 2020). Shareholders may also have green preferences irrespective of financial returns (Hart and Zingales, 2017; Hartzmark and Sussman, 2019).

Unsurprisingly, unions started to express their concerns and mobilize action to affect the direction of net-zero transition in companies. In general, unions navigate between strategies of opposing outright climate change mitigation policies, accepting in principle the need for decarbonization but seeking to minimize any potential attempts or genuinely supporting climate action (Thomas and Doerflinger, 2020).

If labour has any countervailing power (via corporate governance —such as co-determination—, contract, or labour law protections), the potential conflict of interests may delay, dilute, or lead companies to abandon the necessary swift and decisive action. Negative consequences of the net-zero transition in companies (coupled with poor understanding of climate change and cognitive biases) may make the workforce unwilling and resistant to climate action (Vona, 2019), at least in the absence of any concessions.

A relatively frictionless transition is possible if the distributional consequences for labour are addressed. This has been called ‘just transition’, a term originally coined by the unions, but later adopted generally, including in the preamble of the Paris Agreement, to refer to the support to be provided to those who stand to lose economically in the decarbonization of the economy.

For companies, ‘just transition’ encompasses entering a social dialogue with workers, reskilling and retraining them, creating decent jobs and ensuring a social floor for those who are laid-off (Smith, 2017). Enel, for example, engaged in a major transformation of its business in line with its climate goals, affecting more than 68,000 workers. Through social dialogue and a just transition framework that includes retention, redeployment, reskilling and early retirement of elderly workers, all its affected workers have found new jobs or retired.

Although ‘just’ recalls the idea of equity and fairness, it may actually reflect a Coasian bargaining between rational value-maximizers. If managers want to decarbonize the company in line with the goals of shareholder value or welfare, but labour has countervailing power, this can create a situation where managers need to give labour some concessions (a Coasian bribe) which may involve material adaptation benefits for the workforce (as enumerated above in the Enel’s case).

The situation may of course be more complex than this as institutional and governance structures are different in each case. For example, controlling shareholders, especially in the case of the state, can change incentives. The state generally has incentives to address the social impacts of net-zero transition for various reasons, and it may address these directly in the companies that it controls (as in the Enel’s case, where the Italian government has significant share ownership). In doing so, however, the state may have consumed private benefits of control at the expense of (minority) shareholders – the so-called ‘policy channelling’ (Milhaupt & Pargendler, 2018).

Still, it is possible to offer a few general observations regarding the sustainability initiatives currently under way with a view to inform the debate, particularly considering potential stakeholder conflicts that may arise in the green transition.

Firstly, there is a lively debate on directors’ duties (shareholder vs. stakeholder orientation). Although it is likely that the content of fiduciary duties affects how companies would consider potential tensions in their climate action, case studies show that it may not matter much in the end. Five utilities companies that have addressed stakeholder conflicts (albeit to a different extent) come from different jurisdictions where different models of directors’ duties apply: Enel (Italy), EDF (France), SSE (the UK), E.ON (Germany) and ZE PAK (Poland) (see Robins and others, 2021). What may matter, however, is how incentives in executive remuneration are constructed. When compensation is tied only to environmental key performance indicators, managers may become fixated on the environmental side of the net-zero transition without considering the social impacts. If they cannot afford to not consider such impacts, they are even more incentivized to enter a Coasian bargain and give labour some concessions.

Secondly, companies are increasingly subject to climate-related disclosures. Arguably, a related disclosure should be whether and to what extent companies identify and address the social impacts of their net-zero transition. This relates to disclosures on climate-related risks. In fact, unless companies identify and address the resulting social impacts, their transition can be slowed down or stalled, which amplifies the transition risk. The current framework promoted by the Taskforce on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) does not cover such disclosures; Global Reporting Initiative (GRI), however, is currently developing related disclosures for certain sectors (eg coal). Furthermore, these disclosures would add credibility to the net-zero transition plans of companies that need to execute a major transformation. It would be naïve to think that these companies can easily achieve their climate targets without addressing their social impact (even if labour has no formal countervailing power).

Thirdly, potential conflicts are relevant for institutional investors as fiduciaries. As argued above, solving these conflicts will address the transition risk, making the shift to a low-carbon economy more likely in the investee company. This especially concerns those investors for whom the transition risk poses a systematic risk (ie index funds). Another systematic risk concern that may arise in the absence of social impact mitigation is deepening inequality that may harm long-term growth (and thus investor returns) (see Ostry and others, 2014) as well as create heightened social instability due to a transition achieved at high social costs (see also Gordon, 2022). Apart from financial risk concerns, ‘just transition’ is relevant for ‘socially responsible’ investors that (claim to) situate their investment and engagement policies around environmental and social concerns.

Fourthly, sustainable finance may play a significant role in ‘just transition’, especially by targeting investments to projects that alleviate adverse impacts on workers and communities. An example is ‘sustainability (social) bonds’: companies that invest in green assets and operations can simultaneously create jobs for laid-off workers by employing them directly or after reskilling and retraining by using (part of) the bond proceeds for this purpose. In this regard, the EU has already signaled further action. In a recent Communication, the European Commission stated that “[t]he recovery from the pandemic has highlighted the need for a just transition that supports workers and their communities affected by the transitioning of economic activities”, indicating further action regarding the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation.

Overall, potential stakeholder conflicts will be inevitable in the shift to a greener economy at the scale and pace required to avoid catastrophic climate change. Solving these conflicts will be especially important for carbon majors, whose net-zero transformation will have the most positive environmental impact but the worst social effects. A just transition has been called for in terms of maintaining social equity. At the company level, however, addressing these conflicts may be only a part of rational bargaining between different stakeholders of a company, which depends on the underlying power and incentive structures. In brief, if labour has any power to affect the shape and pace of the green transition, shareholders and managers will be incentivized to address labour concerns. States as controlling shareholders are also incentivized to address these concerns as a form of policy channeling.   


Alperen Afşin Gözlügöl is an Assistant Professor in the Law & Finance cluster of the Leibniz Institute for Financial Research SAFE. 


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