Enabling a just transition

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Deborah Zandstra: The UK’s Green Gilts, issued in June 2021 on which we acted as a firm, are noteworthy. HM Treasury in the UK committed to report on the social co-benefits of the eligible underlying green projects.

Dominique Barker: Today, we welcome Deborah Zandstra, partner at Clifford Chance, and Janet Whittaker, who’s Senior Counsel and formerly a partner at that firm. For those who don’t know, Clifford Chance is an international law firm headquartered in London, UK. And on today’s episode, we’re going to be focusing on the concept of a just transition. You may have heard that word. It’s a very important word going forward here and how banks can support this through financing activities and the challenges and opportunities it presents. So in collaboration with the Institute of Human Rights and Business and the CDC Group, and that’s UK’s development finance institution, Clifford Chance recently published a report on the topic titled Just Transactions following consultation with 11 Banks. And for today’s episode, we’re going to refer to this report and we’re just going to call it the whitepaper. So Deborah and Janet and the entire team at Clifford Chance were really pivotal in this research and held the pen on it, which is an incredibly important topic to consider in a Canadian context as we accelerate action to transition to a low carbon economy. Good morning and thank you for joining us on this episode of The Sustainability Agenda and congratulations on the recent accomplishment.

Janet Whittaker: Thanks, Dominique.

Deborah Zandstra: Thank you. Lovely to be here.

Dominique Barker: So we’re going to start with Janet. We’ve got a few questions for you. If you could start by setting the context for our listeners and explain the concept of a just transition and why it is gaining increasing importance.

Janet Whittaker: So achieving a just transition is all about putting people at the centre of the climate change transition. So reaching the Paris Agreement climate goals requires a wholesale transition of the global economy, which have substantial impacts on workers, communities, jobs, consumers. So take, for example, the transition out of the fossil fuel based economy. It’s inevitable that this will cause significant job losses amongst workers and emissions intensive industries, so-called stranded workers, which in turn will have significant livelihood impacts on their communities and on consumers as well. Equally, the transition in to a clean green economy will involve activities that can have important human rights and social impacts. For example, the increase in demand for critical mineral resources that are essential to the production of clean energy technologies can have profound human rights and environmental impacts on local communities. And also, we hear fears expressed regularly that the climate transition may disproportionately impact low income consumers by raising energy prices and other costs. So fundamental to the just transition concept is the transition to a sustainable economy that happens in a way that’s fair and inclusive across regions, sectors, the socioeconomic spectrum and generations. And the Paris Agreement actually embeds the just transition idea. And it was also more recently reinforced in the Glasgow climate pact agreed at COP26 just last year. And this expresses the importance of just transitions that promote sustainable development and the eradication of poverty, as well as the important creation of decent work and quality jobs. And we see this concept gaining prominence both internationally and in many countries and regions for a number of reasons, and I’ll highlight two of those here. I think first, there’s widespread appreciation that in order to bring about the necessary economic transformation and climate action needed to reach net zero goals, there has to be political support and buy-in, especially from workers and communities who will be most impacted. And as part of this, I think it’s essential to include in the debate around the transition, the voices of those who are most vulnerable. And then second, it’s increasingly recognize that achieving a just transition, it’s an important opportunity. And that’s to bring about more robust and socially inclusive economies in which, in the words of the UN Sustainable Development Goals, no one is left behind.

Dominique Barker: That’s great. So we can see why Elisabeth Laratta, who’s really been CIBC’s lead on the just transition, believes that this is really important to Canada because we would certainly have probably over index versus many other countries on this potentially being a risk. So in 2021, we saw heightened focused on the just transition and with that, a spotlight on financial institutions’ role in supporting this economic and social transformation. Can you talk about the role that the financial sector has in this regard?

Janet Whittaker: Of course. So, you know, throughout 2021 and the run up to COP26, I think we saw a heightened focus not only on the urgency of enhanced climate action, but also how to manage fairly the impacts of climate change and transition activities on people and communities. And the idea of a just transition, I think really gained political traction at COP26. We had a dedicated just transition initiative that was launched there that was a sort of a declaration amongst 30 countries who are committing to support strategies, just transition strategies. And these developments build on a number of initiatives over the past few years by certain countries and organizations to establish mechanisms and guidelines around how to support a just transition. So I think one thing that’s very clear is that just transition’s firmly on the agenda and accepted sort of as a vital part of a successful shift to a net zero economy. I think turning to who has a role in supporting this, in particular financial institutions, ultimately prioritizing a just transition as a political issue and internationally and domestically, governments have a crucial role in promoting people centred transitions, and that involves providing policy signals, appropriate regulatory frameworks and public finance to ensure that transition outcomes are brought about in socially inclusive ways. And there’s also a vital role for the private sector, including, of course, finance, which is really what we’re here to talk about today. Why is this? Well, access to private sector investment and finance is crucial to mobilize in the trillions of dollars needed to transition to a net zero economy. And related to this during 2021 in particular, financing a just transition was specifically identified as a gap that needs to be addressed. And so, for example, the G20 sustainable finance roadmap that was issued in October of last year made scaling up finance to achieve a just and affordable climate transition key G20 priority. So it’s increasingly accepted that financial institutions have a role to play. In our whitepaper, we really focus on one specific but significant element, and that’s the role of banks in implementing a just transition in their climate related financing transactions. And the whitepaper reflects extensive engagement with both commercial banks and development finance institutions, including through interviews about how they approach the just transition. Banks across the board recognize the importance of achieving an equitable, inclusive and sustainable transition. Many of the banks, while recognizing the importance of a just transition, haven’t yet adopted specific just transition policies or strategies, but they’re considering how to deploy existing frameworks and tools to do this. It was clear from our interviews that in framing that role, banks are really challenged by the lack of clear policy direction from government and regulators about just transition, including on the role of banks in achieving a just transition and the principles and policies that they should follow.

Dominique Barker: We can acknowledge that financial institutions and government have a role to play, as you’ve described. Let’s talk about the frameworks that are emerging to support financial institutions’ transition to a low carbon economy. What currently exists to address the just transition in the provision of finance?

Janet Whittaker: I’d say that to date, there’s limited specific guidance for the financial sector on addressing a just transition in their operations. The Grantham Institute has published a report on finance and climate action with positive social impact. And this highlights a series of recommendations for banks and the UK government in particular on developing a purposeful and systematic approach, and these principles, of course, have broader application, including in other jurisdictions, but this lack of specific guidance is partly why our report is made up of different components. Looking at the state of play today and how existing norms and practices, be it in risk, compliance, governance, customer fairness principles, or product development, can be extended to cover just transition components. Increasingly, banks already have policies as to how their financing activities can support the Sustainable Development Goals. One recommendation that we make in the whitepaper is that banks consider adopting dedicated just transition policies, and doing so would send a clear signal that the bank recognizes and intends to address interlinked climate and human rights impacts in an integrated fashion. Just one more point on this, which I think is really one of the fundamental conclusions of our whitepaper, which is that while existing frameworks do support some of the, they do provide some of the foundational principles that can support just transition strategies, further work is needed to identify the bridges between these and also the gaps that need to be addressed in assisting banks to implement appropriate strategies, as well as policies, governance and risk management tools across all areas of bank activity, and, of course, importantly, to take account of relevant stakeholders. We point out that a coherent approach is crucial and that, in our view, this requires a new framework of bespoke principles, as well as practical tools and guidance to support banks in ensuring that their climate related activities also, in turn, support inclusive and fair social outcomes.

Dominique Barker: Janet, that’s great. Deborah, let’s turn to you. Janet did a great job speaking about how transitioning the whole economy requires industry, government and community collaboration. Let’s turn to you to discuss the roles and stakeholders perspectives that must be considered in this process. What challenges and opportunities does this present?

Deborah Zandstra: Thank you very much. So, you know, we agree with your premise that this is a collaboration across industry, government and communities. Prioritizing the achievement of a just transition, as Janet said, is a political as well as a policy issue. Effective measures to consider climate change can only be achieved through coordinated international action based on agreed policy objectives such as the Paris Agreement and Glasgow Climate Pact. On the one hand, we see a top down approach. At national level, we see increasing interest by regulators and central bank supervisors. The European Banking Authority has signaled already that the social dimensions of transition are on its radar and the EU is looking to develop a social taxonomy. The concept of double materiality is also of emerging importance. Increasingly, this will lead to disclosure requirements on how businesses are handling climate change and social matters, including human rights. We are seeing a number of countries considering mandatory human rights and environmental due diligence laws. These, we think, will be sympathetic to the United Nations Guiding Principles on business and human rights and the OECD guidelines for multilateral enterprises. Due diligence undertaken in accordance with these frameworks, whether as a reflection of banks’ existing commitments and stakeholders’ expectations or in anticipation of mandatory measures should support the transition. Current top down trends point businesses and banks towards due diligence as the tool for devising climate transitions that are consistent with community and worker concerns. In terms of bottom up, we see increasing activism in civil society and calls for action and greater accountability, not least to deliver greater intergenerational equity and reduce inequalities between the global north and the global south. And this has political impact and feeds into increasing policy making in this space and is also reflected in increasing climate litigation risk and stakeholder activism, of which we expect to see a great deal more in 2022 and beyond. I don’t want to be just negative, though. On the opportunity side, the demand for ESG related products has never been higher,

Dominique Barker: Let’s talk about how we can operationalize this through financial products and services. And maybe you can discuss the types of products that exist today and what’s emerging, and I think of the UK and Europe as being well ahead. So looking forward to hearing your response.

Deborah Zandstra: Of course, we’ve seen this in two ways. One is through adapting existing products such as green social sustainability and sustainability linked bonds and loans to finance investments with their just transition dimension. These products already incorporate disclosure and reporting expectations, which support stakeholder scrutiny of their sustainability credentials. The current principles, published by ICMA to underpin the issuance of green social sustainability and sustainability linked bonds and their equivalent by the loan market associations, don’t specifically address just transition at the moment, but they go some way towards factoring relevant considerations. For example, the ICMA Climate Transition Finance Handbook recommends that the social impacts of any use of proceeds be evaluated, thus reinforcing the idea that green and social impacts should be considered together. The green loan principles also require borrowers to identify exclusion criteria to manage potential material, social risks associated with green projects. And, of course, the sustainability linked bond principles allow for a mix of environmental, social and governance KPIs, key performance indicators, enabling relevant financial instruments to be employed to support just transition objectives. And of course, the sustainability bond guidelines address issuance of bonds that finance a hybrid of green and social projects. The UK’s Green Gilts, issued in June 2021, on which we acted as a firm, are noteworthy. HM Treasury in the UK committed to report on the social co-benefits of the eligible underlying green projects, stating in its underlying framework that it is mindful of the need to honour its commitments within the Paris Agreement to recognize the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities. The second way we see financial products and services is playing a role is just transition being operationalized through the development of new products. This could be through specifically named just transition bonds and loans, just transition linked credit lines for SMEs, transition targeted funding for corporates and consumers, and increasing use of blended financing and investment structures with multilaterals and development banks, which Janet already mentioned. We think there are also advisory services opportunities for banks and that banks can assist their clients with establishing net zero transition plans that consider the social impact of their activities and develop mitigation strategies, for example through funding of new skills training to enable employment transition. And I would expect this to be a rich source of advisory work for you and your colleagues.

Dominique Barker: So that’s very interesting. And I would just observe that a lot of what you said I think about as being a mindset. So thinking about the employees as a stakeholder. Do you have any KPIs in mind as you think about things like just transition bonds or just transition sustainability loans, for example?

Deborah Zandstra: So I think, you know, ones that come to mind are ones that are related to education and reskilling and providing opportunities for employees to acquire skills in different sectors. Also, I think managing transition, so they’re not too abrupt.

Dominique Barker: And Deborah, one last question for you. Do you see any risks of inaction and can you describe them?

Deborah Zandstra: Clearly, the risk of inaction is that at worst an unmanaged transition will put the initiatives to reduce climate risk in jeopardy as an unjust transition could lead some to suffer to considerable negative economic impact and could increase inequality, for example, through loss of employment and decreased access to energy at affordable levels. There’s an ongoing debate about how you reach the right balance between conservation and natural resources and equitable access to social resources and just transition, we think, is the lens through which this can be aspired to. But clearly, as a concept and policy feature, it presents both risks and opportunities for banks and their clients, particularly, as we mentioned, increased litigation risk over time. And we think banks will benefit from being proactive and thinking institutionally how the just transition principle can be reflected throughout an organization both conceptually and practically. We expect, as with the EU regulatory work on ESG taxonomies and so on, that there will be further regulatory action and government level policy developments. But in the meantime, the industry can do its own thinking, and it sounds as you’re already embarked on this and embrace the challenge in its day to day facilitation of finance through extending of internal governance, risk and compliance policies to include just transition components, including enhanced due diligence and disclosure, product and tool development, and engaging with clients on just transition, as I mentioned as part of their transition into low carbon and net zero plans in particular. One finding of our whitepaper is that because of the unique, cross-cutting characteristics of the just transition concept, as Janet mentioned, one approach which is worthy of further consideration is the development of some industry wide principles on just transition, not least so banks won’t be expected to overdeliver beyond what is feasible and practicable within the confines of a bank client relationship such as we know it today. And we really look forward to engaging with the industry further on this.

Dominique Barker: Thank you, Deborah and Janet, for your time today. Really appreciate your time. We will be putting a link to the report that was referred to today, the whitepaper that we referenced all through today into our show notes. And we are going to also include the link to our CIBC Sustainability newsletter that goes out monthly. So watch for that. I also want to give a special thank you to Elisabeth Laratta, who prepared all of the show notes for us today. Really appreciate all the work that she’s done on the topic. I know she’s been working on this deeply and she’s part of our ESG enterprise team. So thank you to her and thank you to Clifford Chance.

Deborah Zandstra: Thank you for having us.

Janet Whittaker: Thank you, Dominique. It’s great to talk about this important topic with you.

Deborah Zandstra: Bye bye.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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