Just transition in supply chains (UN Global Compact)

Our key takeaway: Do businesses understand the different types of risks that climate change presents to their business? The UN Global Compact finds that businesses have typically lacked visibility and understanding of the risks posed by the physical impacts of climate change, which in turn has delayed the development of effective and people-centred climate mitigation and adaption measures. There are three categories of risk posed by climate change: (1) Transition risks (the risks that stem from societal and economic shifts towards a low-carbon and net-zero compatible society); (2) Physical risks (both acute impacts (e.g. heat waves and flooding) and slow-onset impacts (e.g. sea-level rise and rising temperatures)); and (3) Maladaptation risks (adaptation measures that increases people and nature’s vulnerabilities to climate change). Understanding this risks is critical for companies to move forward. What can companies do to address climate change and related human rights impacts? The UN Global Compact finds that they can 1) integrate a just transition lens into risk management strategies and systems; 2) engage with workers and local communities regarding transition planning and climate risk management; and 3) work with other stakeholders, and use leverage, to create robust market incentives for responsible business conduct. In short, “a just transition could help companies unlock the co-benefits of pursuing social and environmental objectives in an integrated manner.”‍

The UN Global Compact released Just transition in supply chains: A business brief (August 2023):

• Different climate risks and their importance to companies’ efforts to tackle climate change: The report highlights three categories of risk posed by climate change, namely: (1) Transition risks, which “relate to a wide array of risks that stem from societal and economic shifts towards a low-carbon and net-zero compatible society.” Such risks include “policy/regulatory risks, technological and markets risks and litigation risks”; (2) Physical risks, which include “both acute impacts (e.g. heat waves and flooding) and slow-onset impacts (e.g. sea-level rise and rising temperatures)”; and (3) Maladaptation risks, which refers to adaptation measures that increases people and nature’s vulnerabilities to climate change. Thus, it is important that companies’ adaptation measures “climate-proof their supply chains for the long-term and build resilience for the workers, enterprises and communities that underpin their supply chains.” In short, it is critical for companies to understand the different types of risks that climate change presents to their business to ensure effective and people-centred climate mitigation and adaption measures. According to the report, businesses lack “visibility and understanding of the risks posed by the physical impacts of climate change” and so "business-driven climate adaptation measures have been slow to develop.”
  

• Interconnections between human rights, the environment and climate change: The report highlights the importance of integrating human rights and environmental business strategies and risk management. Companies appear to be realising the business benefits of a multi-pronged approach: “Businesses are adopting holistic risk management strategies that address the climate and social risks associated with their supply chains.” By “placing fairness, equity and inclusivity at the centre of such strategies”, businesses are able “to identify mutually reinforcing measures and co-benefits that could be unlocked in pursuing climate mitigation and adaptation.” For instance, a dialogue-based approach between companies, suppliers and their workers “creates an opportunity for these businesses to work with suppliers to develop climate-resilient solutions that deliver shared benefits.”
  

• Recommendations to businesses: The report recommends that companies: (1) “Improve awareness of risks of social disruption and climate change in supply chains.” This should take place in parallel with measures to remedy adverse impacts to workers and communities caused by mitigation and adaptation measures; (2) “Improve the transparency of supply chains.” Companies can “conduct materiality assessments and engage with suppliers to better understand their exposure to climate and social risks across their supply chain as well as the negative externalities that businesses have themselves on the environment and society”; (3) “Integrate risk management through just transition principles” which includes “engaging in social dialogue and stakeholder engagement, supporting skills development, respecting fundamental principles and rights at work and undertaking human rights and environmental due diligence.” This in turn will strengthen companies’ climate transition planning and risk management; (4) “Creating market demand from the public sector” by, together with workers’ organisations, advocating for governments “to design, implement and improve policies and incentives that create strong market signals for environmentally and socially responsible business conduct”; and (5) “Support capacity building and access to finance for SMEs” by working with social partners to provide financial and educational support to SMEs so that they can “embed labour and human rights into climate mitigation and adaptation measures.”