U.S. Banks Have an Opportunity To Advance a Just Transition. Here’s How.

November 2, 2023 /3BL/ - With capital pouring into electric vehicle manufacturing, decarbonizing buildings, greening the grid, and advanced manufacturing, the shift to a clean economy isn’t hypothetical anymore.

Last year, for the first time ever, global investment in low-carbon technologies reached parity with investment in fossil fuel projects, hitting $1.1 trillion. In the U.S., ambitious federal and state policies—full of incentives and rules encouraging homegrown green tech and climate resiliency – have unlocked hundreds of billions in private investments.

This flood of investment isn’t just reshaping industries, it’s dramatically changing American jobs and communities. This is why, as the clean energy transition accelerates, banks must get serious about assessing the impacts of how and where they choose to invest and lend money.

The success of the clean economy—and banks’ net zero ambitions—lies in this transition being just and equitable. Getting it wrong could exacerbate inequality, as the pollution and other devastating impacts of the climate crisis, from record flooding to punishing droughts, would fall disproportionately on vulnerable communities, and leave displaced workers without a viable future. All of this could lead to banks facing new regulatory, reputational, market, and business risks, and an increase in public distrust.

Why banks need to act 

Banks have a key role to play in helping their clients move through the clean energy transition and they must understand the social impacts of that work. Potential negative impacts that need to be considered range from job losses (due to changes in how energy is produced and consumed), to exposure to pollutants (from the opening of new mines for critical minerals), to the slowing of development in any parts of the developing world that are prevented from accessing clean, affordable energy.

Ensuring that the rapidly accelerating transition is just and equitable is a forward-looking endeavor, but this work can also help banks address the impacts of past lending and investment practices, such as redlining, that have exacerbated racial inequities while also disproportionately exposing communities of color to extreme heat, higher flood risk, and poor air quality.

And banks need to avoid the very real pitfalls that new approaches may create. Some banks may have inadvertently participated in ‘blue-lining’— reducing risk exposure to low-income neighborhoods based on their susceptibility to climate-related disasters. These are often the communities that already have the least access to disaster insurance and the funds necessary to adapt to the effects of climate change.

The expectations of investors, regulators, and industry groups are growing in step with these risks. And stakeholders have a term for the broad-based effort to prevent them: they’re calling for a “just transition,” and it has been cited as a priority through many significant climate finance initiatives, such as Ceres’ Ambition 2030, the Institutional Investors Group on Climate Change (IIGCC), the Glasgow Financial Alliance for Net Zero (GFANZ), the Net Zero Banking Alliance, the International Labor Organization (ILO), and Climate Action 100+.

Furthermore, U.S. regulators are including environmental justice and just transition issues in new or existing policies, including the proposed revisions to the Community Reinvestment Act (CRA), the Inflation Reduction Act, and state policies, such as Illinois' Climate and Equitable Jobs Act (CEJA) 2021. The recent rulemaking to modernize the CRA, for instance, would allow banks to fulfill their CRA obligations by helping low- and moderate-income communities build resilience to climate-related events.

Large global banks have started taking the first steps 

Some of the biggest banks have acknowledged the need to include just transition considerations as part of their climate-related planning, though concerted action on the topic is yet to materialize. With banks at various stages of their planning on just transition, a few good early examples have emerged.

In its latest Task Force on Climate-related Financial Disclosures (TCFD) report, Bank of America committed to supporting clients as part of a just transition to a low-carbon economy by mobilizing and deploying $1 trillion, part of its $1.5 trillion by 2030 Sustainable Finance goal. Citi’s 2021 TCFD report stressed balancing just transition and appropriate decarbonization. Barclays is a member of the Financing a Just Transition Alliance, which is looking to find ways to facilitate and support just transition activities.

What U.S. banks can do 

While recognizing that this is a complex topic and that priorities for banks are rapidly shifting due to political and market factors, there are a few key areas banks need to focus on:

• Governance: Just transition needs to be a long-term commitment on the part of banks’ leadership, and oversight at the C-suite level is critical for banks to commit in a long-term and meaningful way and avoid accusations of “blue-washing.”
• Client Engagement Strategy: Banks should include just transition in their client engagement strategies, and aid clients in establishing net zero transition plans that consider it. A successful energy transition would require re-skilling affected workers for new jobs and simultaneously supporting their communities, something that banks can and should support.
• Due Diligence Systems and Products and Services: Banks can consider re-evaluating their environmental and social risk management due diligence policies to incorporate just transition. Banks also have opportunities to incorporate just transition elements into financial products and services and can work directly with local organizations by forming Community Benefits Agreements.
• External Partnerships and Collaborations: Banks should partner with Development Finance Institutions (DFIs) to ensure communities benefit from efforts initiated by banks. DFIs work directly with communities and can provide beneficial partnership and investment opportunities for commercial banks to support communities impacted by the energy transition.
• Positive Policy Advocacy: Banks should proactively promote more policy action on just transition and clarify their stance on this topic through their industry associations or on their own.

By Amit Bando, Ceres chief economist and senior advisor for Just and Inclusive Economies, and Richa Agarwal, Ceres manager, Company Network, financial services