Banks play a key role in the just transition; though many are still at the start of their journeys, there is ample space for banks to take a leadership role alongside other players

Week of 13 December 2021

Banks play a key role in the just transition; though many are still at the start of their journeys, there is ample space for banks to take a leadership role alongside other players

Our key takeaway: Access to finance is a critical part of ensuring that a just transition for workers, communities and consumers can become a reality. Despite a lack of clear policy direction for banks to date, aligning with existing frameworks like the UNGPs and the OECD Guidelines can help banks to operationalise their just transition commitments.

Clifford Chance LLP, the Institute for Human Rights and Business (IHRB) and the CDC Group published a white paper based on interviews with the banking sector, examining what the just transition means for banks in practice:

    • Just transition considerations are “highly relevant” for climate-related financing: The paper points to three top motivations—representing both risks and opportunities—for the sector to apply a just transition lens to any lending activities related to climate transition: First, many banks have made their own commitments to align with and report against international standards invoking a just transition, such as the Paris Agreement, SDGs and the UN Guiding Principles on Business and Human Rights (UNGPs). Their stakeholders and clients have likewise made these commitments and are demanding the same of banks. Second, there are both regulatory and litigation risks if banks do not align with a just transition. The report points to drivers like increased bank regulation and supervision by central banks and other oversight mechanisms, regulatory sustainable classification systems like the EU Taxonomy for Sustainable Activities, mandatory human rights and due diligence laws, climate change litigation against private sector actors, and “double materiality”—that is, the concept that banks face risks both from financial materiality (“outside-in”) and environmental and social materiality (“inside-out”). Third, there is a clear business opportunity, as demand continues to grow for “green, social, sustainable and other forms of ESG financing.”
    • But there is a “lack of clear policy direction” on the role of banks in a just transition: The report notes that “existing frameworks [like the UNGPs and OECD Due Diligence Guidelines for Responsible Corporate Lending and Securities Underwriting] provide many of the foundational principles that can underpin just transition strategies, but further work is needed to identify bridges between these and any gaps to be addressed to identify appropriate pathways to address just transition in the provision of finance.” To that end, the report also emphasizes the crucial role of partnership beyond the banking sector to achieve a just transition: “Success will involve not only the banks, but also other investors, governments and international, regional and domestic public financial institutions, as well as experts across a range of subject areas, including climate change, human rights, transition industries and economic development.”
    • So, what steps should banks take? The report outlines some key steps for banks to operationalise their just transition commitments. This includes strengthening just transition considerations in banks’ governance and systems—having the right leaders and skills in place, ensuring that climate strategies account for social impacts and cover the full scope of products and activities, adopting just transition policies and tying them into other existing policies, implementing just transition considerations across all risk management systems, and meaningfully disclosing to stakeholders on their progress. On a transactional level, banks should also be engaging with clients to drive forward the just transition agenda by understanding the context for social and environmental risks in different markets, identifying additional funding sources, preparing clients to consider their own role in the just transition, screening clients and transactions, and implementing robust “just transition due diligence” in line with frameworks like the UNGPs and OECD Guidelines.

For more, see Clifford Chance LLP, Institute for Human Rights and Business, and CDC Group, Just Transactions: A White Paper on Just Transition and the Banking Sector (December 2021)