Just transition update: Investor expectations for the banking sector

Royal London Asset Management and select partners have been engaging on just transition since 2019 and have focused our engagement specifically on three sectors – utilities, social housing and banks. 

Our engagement with banks begun in 2022 with our attendance and speaking at the AGMs of Barclays, Lloyds Banking Group, NatWest, and HSBC – where we asked whether they would consider integrating just transition throughout their climate transition plans.

Since then, we have met with these four banks on multiple occasions, working with them to shape the integration of just transition in their operations and products and services, and tracking the progression of their plans. For more information on our engagement and the progress we have observed on just transition, please see our current and archived Stewardship and Responsible Investment Reports. Through this long-standing dialogue we have refined our understanding to better account for the complexities of the sector. We were also invited to support the External Advisory Board of the International Labor Organization (ILO) and United Nations Environment Programme Finance Initiative (UNEP FI) Just Transition Finance Project. In parallel we have contributed to the work that the Transition Pathway Taskforce (TPT) developed around the inclusion of just transition in climate transition plans.

Royal London Asset Management, working collaboratively with Borders to Coast Pensions Partnership and Friends Provident Foundation, have now written Investor Expectations for the Banking sector on Just Transition. This expands our engagement programme, providing banks with clear and public expectations and enabling other investors to assess and engage with banks on their performance on just transition. The expectations, which can be read below, provide a high-level guide on why banks should care, and examples of how we think it can be integrated into credible climate transition plans.

What is a just transition?

Rapid climate action is required to prevent the worst human and economic costs of climate change and a just transition aims to ensure that decarbonisation is both fast and fair. The social impact of the low carbon transition on workers, communities, customers and supply chains has the power to either accelerate or prevent progress to decarbonise the economy, creating competitive advantages or uncertainty and added costs. Just transition aims to connect climate goals with associated social outcomes and seeks to promote and encourage development of a sustainable economy by mitigating social risks, seeking social opportunities, and focusing on place-based impacts.

How does it impact the banking sector?

Banks have a key role to play in the green transition, both via capital allocation and support for customers to transition. They are better placed than most companies to consider place-based investment at a regional level and have material social risks that require management. Given this, we believe a compelling reason exists for investors to help banks increase their awareness of and approach to a just transition, for the benefit of our holdings and society. We believe banks that integrate just transition into their net zero strategies will be in a better position to manage the transition and benefit from lending, investment and reputational opportunities presented. Moreover, just transition is a hallmark of credible climate action, and is becoming a core expectation for various frameworks as shown later.

Risks and opportunities will present themselves in different ways in banks’ core business activities, which may include:

• Corporate banking and project finance
• Commercial banking (Small and medium-sized enterprise (SME))
• Retail banking
• Investment banking
  
  

What do investors expect banks to do?

It is necessary to integrate just transition across products and services and operations. Given the expectation that many banks will follow the Transition Pathway Taskforce’s (TPT’s) guidance for their transition plans, we have used the TPT Disclosure Framework to break down just transition integration in a way that is consistent with the TPT Bank Sector Guidance. Structured through the three guiding principles of the TPT Disclosure Framework (see Figure 1), our expectations focus on Action, but also highlight important considerations of just transition relating to Ambition and Accountability.

Figure 1: Principles and corresponding disclosure elements adapted from the TPT Disclosure Framework

Source: TPT Disclosure framework 2023

1. Ambition

We expect banks to either have a standalone just transition plan or explicitly and judiciously incorporate just transition into a wider climate transition plan. Mitigating risks and harnessing the opportunities of a just transition requires articulating what it means for the bank, and it needs to be connected to its profile. This includes the nature of its operations, sectoral and geographical footprint, the client segments served and its overall strategy.

2. Action

To implement just transition, we expect banks to consider their relevant stakeholder groups (customers, workers, communities, and supply chains). We believe that three lenses, namely at product, sector and region level, can help identify areas of implementation. The table below showcases the integration of risks, opportunities and processes which banks could consider when translating just transition ambition into action.

Banks conduct inclusive human rights and environmental due diligence, consistent with the UN Guiding Principles for Business and Human Rights (UNGPs), to identify and mitigate potential adverse impacts.

Products

• Ensure inclusion and accessibility are features in new green product development, to enable all customers to participate and benefit from the transition (e.g., home retrofitting loans).
• Develop and implement a responsible decarbonisation strategy for existing products and portfolios, such as mortgages, ensuring that decarbonisation is achieved without excluding customers and mitigates 'stranded customer' risk.
• Offer financial instruments promoting transition and combined environmental and social impact (e.g., sustainability-linked loans or bonds, where the interest rate or coupon is tied to the borrower's achievement of predetermined environmental and social targets).
• Develop partnerships with public banks and community development finance institutions (CDFIs) or equivalent to support SMEs and microenterprises and provide blended finance solutions to support place-based just transition.
• Ensure that corporate and commercial banking products respect and promote stakeholders’ fundamental rights (e.g., the ILO’s Declaration on Fundamental Principles and Rights at Work).

Sectors

• Facilitate investment and leverage lending relationships to support corporates and SMEs in high-emitting sectors access the capital required to enable and encourage the just transition to net zero.
• Develop sector-specific transition roadmaps for high-emitting sectors where appropriate, encouraging a managed phase-out that ensures worker dialogue, retraining, redeployment, and fair early retirement/redundancy to mitigate ‘stranded worker’ risk.
• Integrate just transition strategy into client transition plan assessments, particularly for high-risk sectors, and include sector specific expectations in client engagement covering workers, customers, communities, and supply chains.
• Enable and encourage companies involved in transition sectors to seek community benefits as part of transition plans.
• Build internal capacity to engage and advise corporate and SME clients on a sector-specific basis on transition opportunities.
  
  

Geographic regions (applying to both national and sub-national regions)

• Integrate just transition into regional corporate banking decarbonisation strategies and identify geographic areas with high exposure to transition risk, seeking to mitigate ‘stranded community’ risk.
• Use banks’ regional reach to provide strategic advice and guidance through lending relationships to help mitigate place-based risks and seek place-based opportunities (e.g., signpost regional support and incentives available to customers).
• Establish dialogue and feedback mechanisms with trade unions, communities, local authorities, NGOs and policymakers that will enable community voices to be heard. Reflect outputs in bank decarbonisation strategy and develop partnerships to advocate for just transition policies at local, national and international levels.
• Recognise global disparities between developed and emerging markets in client transition plan expectations and assessments, with differentiation in timeframes where appropriate.
• Consider implementing specific support for retail clients in regional communities which face asset or industry closure.

3. Accountability

Banks should describe their just transition integration and delivery plans with robust governance and reporting on progress. Integrating just transition into governance mechanisms encourages consideration in internal decision making. By making a high-level commitment and assigning clear roles and responsibilities, the necessary environment for execution and accountability can be fostered.

Metrics and targets are an important way for banks to internally assess progress and outcomes and learn and adapt. They also enable investors to monitor the progress and success of banks’ integration of social considerations. Metrics are commonly split into process and outcomes metrics, with several examples of metrics below:

Process metrics

• How many of the bank’s staff have received training on just transition?
• How many SMEs has the bank provided climate transition advice to?

Outcomes metrics

• How many corporate clients have published transition plans with just transition factors incorporated and/or a standalone just transition plans?
• How many corporate clients are monitoring just transition metrics?
• What percentage of retrofit loans resulted in an improved SAP rating for low-income households?

For further guidance, the TPT’s Just Transition Working Group advisory paper provides general industry examples, and the ILO and UNEP FI Just Transition Finance Pathways for Banking and Insurance provides sector-specific examples.

Helpful resources

These investor expectations have been created with the use of detailed resources, which are listed below for further reading and help.

ILO and UNEP FI Just Transition Finance Pathways for Banking and Insurance
TPT Banks Sector Guidance
LSE and ILO report
TPT Just Transition Working Group advisory paper
IIGCC and TPI Net Zero Standard for Banks

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.