Banking the just transition in the UK

Published on October 14, 2019
Nick Robins, Sophia Tickell, William Irwin

This policy insight is the first output from the Banking on a Just Transition project. It looks at the specific contribution that the banking sector can make to ensuring that a just transition happens in the UK, under the Government’s commitment to a net-zero-carbon economy by 2050. The paper is designed to provide the basis for dialogue at a series of roundtable events across the UK through 2019 and into 2020.

After presenting the case for action by the banking sector, the paper identifies five priorities for dialogue and action:

  1. Renewing purpose throughout sustainable finance, with a new focus on the just transition as a bridge between the environmental and social dimensions.
  2. Supporting customers through a just transition, notably households, small and medium enterprises (SMEs), corporates and public authorities. The paper looks in particular at the challenges faced by SMEs and households with residential mortgages.
  3. Responding to place-based priorities in terms of the differential impacts of the transition across the country and building ‘anchor’ financial institutions.
  4. Shaping the policy and incentive regime in terms of the climate policy architecture (such as carbon pricing), financial regulation and the role of public finance institutions.
  5. Exploring wider system innovations in terms of the capital mix, risk management, real economy linkages and citizen engagement.
Summary points

Making the shift to a sustainable economy in the UK will require the full mobilisation of the country’s £20 trillion financial system. The banking sector forms the largest part of the UK’s financial system and it will need to increase the quantity of capital flowing to investments that drive emissions down to zero and strengthen resilience to the physical shocks of climate change. The sector will also need to improve the quality of capital to ensure that the shift is fair and inclusive across the country. This is the agenda of the just transition.

The need for the just transition is increasingly recognised by policymakers, trade unions, business, financiers and civil society. The imperative of a just transition is included in the 2015 Paris Agreement on climate change and was part of the decision-making that resulted in the UK’s legal commitment to reducing greenhouse gas emissions to net-zero by 2050. Scotland has established a dedicated Just Transition Commission, the Trades Union Congress (TUC) has published a set of just transition principles and the UK’s new Green Finance Strategy also highlights its importance.

For the banking sector, the emergence of the just transition comes at a time of increased focus on strategic purpose. Sustainable finance and responsible banking are becoming core to the way that banks are focusing on serving society. As part of the implementation of the new Principles for Responsible Banking, banks could consider making a commitment to supporting a just transition. This would mirror actions being taken on the just transition by more than 140 investors worldwide with US$8 trillion in assets.

The main way that banks can play a role in helping to deliver a just transition is by supporting their customers and clients. Banks and other finance providers will need to address questions around the demand for sustainable financial products. Successfully identifying the opportunities that arise could result in improved customer engagement.

Financing the UK’s diverse SME sector through the transition will be crucial. Small and medium enterprises (SMEs) contribute to economic development, employment, innovation and social cohesion, and they are especially important in economically deprived areas. But SMEs can lack time, capital and access to expertise and often have limited market power.

Upgrading the building stock to make it more energy efficient and reduce emissions has intrinsic social implications. About a third of homes with weak energy performance are not in the ‘able to pay’ category. In addition, workers in the construction and real estate sector will need to upgrade their skills to support the retrofit and new build requirements. Innovations in green mortgages remain early-stage at present.

The transition will play out unevenly across the country, requiring a strong focus on bottom-up initiatives to finance a just transition. Our work reveals an unmet demand for place-based financing that supports the net-zero economy and delivers positive social impact in both rural and urban communities. Locally-rooted banks and financial institutions need to identify how they can play an anchor role in affected regions.

The policies to deliver the transition are still to be formed, whether in terms of climate and industrial strategy, financial regulation or public finance. The dynamic between the banking sector and public finance will be particularly important to get right as Brexit raises questions about successors to European funding and investment.

Wider system innovations could well be needed in terms of developing the right capital mix for the economy as well as how to manage risk in the transition. Banks are currently risk averse at a time when increased risk capital is needed to drive innovation. New models of dialogue and participation will also be needed, such as Citizens’ Assemblies.