The banking and finance industry has welcomed a report that sets out how the sector can work together to drive an environmentally sustainable economic recovery and deliver a just transition to net zero. The report, 'Financing climate action with positive social impact: How banking can support a just transition in the UK', has been produced by the Grantham Institute at the London School of Economics (LSE) in partnership with UK Finance, with funding from HSBC and LSE's KEI Fund.

Under the Paris Agreement on Climate Change a ‘just transition’ will see the interests of workers being upheld in the shift to a resilient, net zero economy by 2050. The report highlights that in practice this means that to successfully combat climate change it will be necessary to design a transition that is fair and seen to be fair, that can uphold living standards, and generate a range of benefits for business and society.

This latest research has been published as part of The Banking on a Just Transition project, a pilot initiative based on a process of research and collaborative dialogue between stakeholders, including banks and other financial institutions, as well as policymakers, business, trade unions and civil society. The project has included place-based consultation workshops in Belfast, Birmingham, Bristol, Cardiff, Cornwall, Edinburgh and Leeds.

The banking and finance sector will be crucial to making the just transition a reality. The Grantham Institute’s report sets out the following recommendations for how the industry can build on existing initiatives and support this goal:

• Leadership: Board-level commitment to ensuring that the just transition is incorporated into institutional strategies and culture.
• Purpose: Ensure the just transition is central to the industry’s core purpose and business model, and that it is embedded in its strategic objectives.
• Strategy: Create a clear institutional action plan for how banks can operationalise the just transition.
• Customers: Serve customers by developing a core portfolio of financial products and services that help them achieve net zero in a socially inclusive manner.
• Place: Continue to work with key stakeholders in different parts of the country to respond to the diverse needs throughout the just transition.
• Policy: Engage actively with policymakers to encourage the right environment for the just transition and system-wide innovation.
• Partnership: Engage in dialogue with government, business, trade unions and civil society to integrate emerging needs and develop breakthrough partnerships.
• Accountability: Report on progress towards our just transition goals in each firm’s Strategic Report in the Annual Report and Accounts.

"Achieving the UK’s net-zero carbon target by 2050 is a difficult but critical target that requires coordinated action across industries," said Bob Wigley, chair of UK Finance. "This important report from the Grantham Institute sets out clear steps for how the banking and finance industry can play a central role in delivering this goal through a just transition and we commit to acting upon its recommendations. Banking and finance firms already play an important part in supporting local networks comprising of corporates, SMEs, local authorities, universities and other sources of expertise. As part of this, we will continue to work with the Green Finance Institute, as well as other new or repositioned investment institutions, to help mobilise capital in a way that takes account of local community needs. We also call on the government to back the report’s recommendations for how it can support the just transition."

Recommendations for government

As well as providing recommendations for banking and finance industry, the report also includes the following recommendations for government:

Make a strategic commitment to a just transition

This could be characterised by a just transition policy statement and the creation of a multi-stakeholder ‘Just Transition Task Force’ to advise on implementation, the establishment of just transition sectoral plans, and the identification of just transition standards to be applied by government, business and finance.

Kick-start the just transition through the UK’s COVID recovery plans

This could involve aligning recovery plans with the Paris Agreement, and targeting a sizeable proportion of stimulus spending on sustainable growth opportunities with strong economic multipliers in terms of job creation and productivity enhancements via investments in skills, innovation and infrastructure.

Align public finance with the just transition 

This could include extending the mandates of existing institutions like the British Business Bank to support the SMEs through the just transition, the establishment of a UK National Investment Bank (with an explicit sustainability mandate) to focus on infrastructure and buildings, including fiscal policy in the just transition policy statement, and issuing sovereign green bonds to finance a just and sustainable recovery programme.

Integrate the just transition into financial regulation of climate risk

This includes exploring how the social dimension of the transition can be incorporated into the reporting framework of the TCFD, and using the results of the forthcoming climate stress test to identify transition hot spots across the country.

Commit to supporting place-based action to deliver a just transition

This could include applying the just transition policy to the Shared Prosperity Fund, adapting the Social Value framework as a tool for local authority procurement, extending Climate Emergency declarations to include a commitment to the just transition and mobilising finance to support this, and expanding the UK impact investment and community finance market as a tool to deliver the just transition at the local level.

Make the just transition a key part of international climate action

This could involve promoting the just transition as a key approach to achieving ambitious climate outcomes during the UK’s presidency of the G7 and at the COP26 summit in 2021, mobilising the international financial community in partnership with UK banks and investors to help deliver the just transition, and setting the standard through leadership on the just transition from the UK’s internationally-facing financial institutions such as CDC and UK Export Finance.