Reconciling ethics and returns in pursuit of a sustainable economy

The transition to a net-zero carbon economy is often thought of as inevitable given the overwhelming scientific consensus that mitigating climate change is necessary to avoid catastrophic consequences.

However, justice within this transition is not guaranteed. The concept of a ‘just transition’ represents a difficult ethical and systemic challenge, and the pathway to achieving it is full of tensions, contradictions, and conflicting incentives.

The term ‘just transition’ encapsulates the idea of ensuring fairness and equity in the shift towards a sustainable economy, particularly for those who may bear the brunt of the transition’s disruptive effects, such as workers in carbon-intensive industries, marginalised communities and populations in developing economies.

When surveyed, members of Thinking Ahead’s Climate transition working group agreed unanimously that a just transition and inequality are systemic risks which will impact the carbon transition and have the potential to derail it. Justice directly intersects with the global push for decarbonisation and climate resilience.

When it comes to responsibility for action, however, there is a stark division in perspectives on the roles and responsibilities for addressing the just transition. Approximately 25 per cent of the working group viewed the issue as the responsibility of governments, arguing that public institutions possess the necessary tools, authority and resources to address such complex social challenges. On the other hand, 75 per cent acknowledged that governments cannot tackle this challenge alone, emphasising that investors and private institutions also hold a critical role in shaping solutions.

However, despite this broader acknowledgment of shared responsibility, a substantial tension emerged when it came to action. The majority expressed an unwillingness to compromise their financial outcomes in pursuit of just transition objectives. This highlights a critical ethical dilemma for investment organisations: balancing fiduciary duties to maximise returns with the broader societal need to mitigate systemic risks. The current reality, shaped by the incentive structures that dominate financial markets, underscores a collective inertia that prioritises short-term gains over long-term systemic stability.

The reluctance to share the pain stems from several factors – current incentive structures, perceived lack of responsibility, unclear benefits, which are diffused and long-term.

Meanwhile, there are also cultural norms. Societal values that emphasise material wealth and individual success over collective wellbeing hinder the cultural shift needed to prioritise equity and sustainability. This mindset discourages actions that appear contrary to personal economic interests.

Addressing the systemic risks of inequality and climate transition requires a fundamental cultural shift – from decades of prioritising wealth accumulation to valuing well-being, relationships and societal harmony (and, possibly, the value of accumulated wealth over the long term).

Such a transformation is difficult and takes time. It involves redefining success and aligning economic incentives with sustainable and equitable outcomes. For instance, the integration of environmental, social, and governance (ESG) considerations into investment frameworks appeared to be gaining traction, but it ran into stiff opposition from the dominant mindset that prioritises financial returns. A meaningful cultural shift would require embedding principles of justice and equity at the core of financial systems.

The recognition of a just transition as a systemic risk is an important step, but it must be followed by meaningful action. Investors, along with other stakeholders, possess agency within the system. Through lobbying, advocacy, and innovative financial instruments, they can influence the rules and incentives that shape market behaviour.

By reallocating capital to support a just transition and by investing in climate solutions in emerging markets, they can accelerate the shift and contribute directly to equitable outcomes. Engagement with industries and policymakers allows investors to push for higher standards in corporate practices and shape regulatory frameworks that incentivise sustainable and inclusive practices.

Reconciling the tension between ethics and practicality in investment strategies requires a significant shift in perspective. Investors must recognise that justice and sustainability are essential elements of long-term value creation and move towards action. While the current incentive system reinforces the primacy of short-term financial returns, there is growing recognition that such a narrow focus is unsustainable in the face of mounting social and environmental challenges.

Addressing systemic risks, such as social inequity and climate injustice, demands a move away from short-term profit maximisation towards a broader, systemic approach that acknowledges the interconnectedness of economic, social, and environmental factors.

The interplay of all these factors in the transition to a sustainable economy will shape the trajectory of our collective future. The costs of inaction can be profound, so the question is not whether we can afford to act but whether we can afford not to.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.