Just transition has the potential to be the new engine of sustainable growth, in lower, middle, and higher-income economies. To this end, private sector involvement is essential to mobilize the US $9.2 trillion dollars annually necessary to transition to an inclusive net-zero economy. Just transition is relevant not only in the context of the developed and developing worlds and their historical responsibility but also in regional contexts where inequalities are widespread and climate change has disproportionate effects on communities. For instance, in the United States of America, Hispanics and African-Americans breathe in 63% and 56% more pollution than they make respectively. On the other hand, Caucasians are exposed to 17% less air pollution than they make.

These considerations are relevant to banks firstly because they are expected to align with or are publicly committed to relevant international sustainability, climate, and human rights standards. Several banking sustainability and climate change initiatives do not (yet) specifically address people’s transition impacts, but some lay the groundwork. For example, the UNEP FI Net Zero Banking Alliance Commitment includes a commitment to consider the associated social impacts of lending and investment portfolios aligned towards net-zero. 122 banks representing 40% of the global banking assets have signed up to Alliance sending encouraging market signals. Second, legal, and regulatory drivers that support or require banks to address the social impacts of climate change. For instance, ECB recently indicated a shift in its supervisory approach that begins to lay the foundations for more inclusive risk assessments. Lastly, just transition provides an opportunity to build on existing products designed to finance climate-related activities, while developing new innovative just transition financial products that respond specifically to net-zero transition’s social challenges and opportunities.

Incorporating just transition concepts into operations also presents challenges:

• There is a lack of clarity in government and regulatory policies regarding just transition. As an example, banks that want to incorporate climate risk into their operations typically follow the TCFD structure, which does not think about inclusivity, equality, or just transitions
• Banks face a paradoxical dilemma in creating just transition financing products and approaches that are inclusive of low-income customers and ensure the commercial viability of the products
• Non-financial disclosure frameworks lack distinct metrics to address just transition, making it difficult to formulate action plans

Strategy, tools, and products can help address these challenges.

Strategy:

• Climate-related divestments need responsible exit strategies to avoid unintended environmental and social impacts
• In order to sustain just transition objectives, management systems, and actions must be coherent through collaboration between climate change and human rights risks teams
• At a portfolio level, heat maps, stress tests, customer sustainability classification, and portfolio assessments can be used to ensure just transition

Financial products

• Social bonds could be used to cover just transition activities such as education, vocational training, affordable housing, and employment generation
• Sustainability-linked bonds and transition bonds could be used for just transition activities that can be measured through dedicated KPIs.
• Just transition bonds that can provide financing to sovereign issues to finance social and just transition projects. An example is Snam’s transition bond which aims to reduce CO2 and CH4 emissions by 40% by 2030 and 2050. By including elements of inclusivity, accessibility, and justice, such initiatives can contribute to a just transition. To this end, as part of its recommendations to banks, Grantham Institute emphasizes leadership, purpose, policy, partnerships, and accountability to consider the social dimension of transitions, including workplace and community initiatives in areas where high-carbon sectors are already declining or will soon be.

We can utilize these products and strategies to mobilize funds, as well as signal the markets and facilitate the transition to net-zero.