Banks have a fundamental role to play in the pursuit of a just transition—an energy and climate transition that is not only environmentally sound but also socially equitable and aligned with international human rights law standards. Through their lending and investment decisions, banks can leverage financial power to shape corporate behaviour and to channel resources into urgently needed climate solutions.

But this positive potential comes with responsibility. In this post, I explore the responsibilities of banks under the relevant business and human rights standards, the key challenges hindering their contribution to a just transition, and the growing guidance available to close existing governance gaps.

Banks’ Responsibilities under the UNGPs and OECD Guidelines

Under the UN Guiding Principles on Business and Human Rights (UNGPs), banks have a responsibility to conduct human rights due diligence (HRDD) – a duty that is nowadays largely interpreted as extending to environmental and climate-related impacts. The UNGPs require banks to assess how their financial activities, including those carried out through investee companies or project finance, may cause, contribute to, or be directly linked to adverse impacts on people and the planet.

This understanding is supported by the 2023 revised version of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, which has clarified the climate responsibilities of business, highlighting the interconnectedness of environmental, social, and human rights dimensions. These developments underline that banks cannot treat climate due diligence in isolation and that they must adopt an integrated approach to human rights and environmental risks. Three challenges must be addressed, in this respect.

Challenge #1: Insufficient Understanding and Operationalization of Human Rights Responsibilities

A first and significant obstacle is the limited understanding and internalization by banks of their responsibilities under the UNGPs, which results in uneven and often inconsistent due diligence processes.

A recent study examining 178 banks across 27 countries over the period 1990-2018 found that 36% of them had been involved in at least one case of negative human rights impacts, mostly of an indirect nature. That is, in 70% of these cases, banks were linked to human rights harms through their lending and investment activities. One-third of the banks were found to have contributed to at least one impact.

At the same time, BankTrack’s 2024 Global Human Rights Benchmark, which assessed 50 leading banks, shows that none of the banks fully meet their responsibilities under the UNGPs. Only 30 banks in the study extend their human rights commitments to financing activities, and only half give any consideration to meaningful stakeholder consultation in their risk assessments. In addition, explicit references to environmental impacts were found in the human rights policies of only 3 banks. The Benchmark also shows that fewer than 1 in 5 banks respond meaningfully to civil society inquiries regarding alleged human rights abuses, while none have mechanisms to ensure that clients or investees obtain Free, Prior and Informed Consent (FPIC) when required by international standards. This lack of institutionalization of human rights responsibilities is a major roadblock to a credible contribution to a just transition.

Challenge #2: Addressing Human Rights, Environmental, and Climate Impacts in Silos

Even when due diligence processes are in place, another critical challenge is that human rights, environmental, and climate change risks are often addressed in silos. This fragmented approach is not only inefficient, but it can also lead to deeply harmful outcomes.

Many examples across the globe illustrate how decoupling corporate action in relation to climate change and sustainable development from the human rights normative framework can lead to adverse, sometimes calamitous outcomes. A case in point is represented by the adverse human rights and environmental impacts of carbon-offsetting projects that have been put in place with the alleged goal of contributing to climate change mitigation, but without due consideration to the likely impacts on local communities, workers, and biodiversity in the host countries. In some cases, the sale of large plots of land for carbon-offsetting project, considered akin to land-grabbing by local communities, has fallen short of transparency and of any meaningful participation of affected stakeholders in the relevant decision-making processes. Windfarms built on traditional community land have negatively affected the rights of indigenous peoples and local populations. Mining projects deemed necessary for the procurement of minerals and metals used in the energy transition, including current pressure to authorize deep seabed mining in the international deep seabed, are another example of business activities that might be construed in the public discourse as contributing to the sustainability transition, but that in fact present highly problematic environmental and human rights risk profiles.

As emphasized in the 2023 OECD Guidelines, climate due diligence responsibilities under Chapter VI must be implemented in conjunction with respect for labour rights (Chapter V) and social safeguards. Responsible disengagement, transparency, and participatory processes are essential to ensure that ‘green’ investments do not reproduce old patterns of exploitation.

Challenge #3: Gaps in Global Sustainability Frameworks

A third key challenge lies in the weak integration of human rights responsibilities within global sustainability frameworks, such as the UN Sustainable Development Goals (SDGs).

While the SDGs acknowledge the role of the private sector in achieving global development targets, they fail to clearly articulate the normative framework within which corporate conduct should take place. The UNGPs are referenced only once in the entire 2030 Agenda. The SDGs emphasize “global partnerships for sustainable development,” but without any reference to corporate responsibility or due diligence obligations.

This omission enables selective interpretations of what sustainability entails. As the UN Working Group on Business and Human Rights noted back in 2017, “respect for human rights must be a cornerstone when envisioning the role that business will play in the pursuit of the SDGs.” Investments framed as contributing to sustainable development cannot come at the expense of human rights. To avoid this, States must ensure policy coherence, and banks must embed respect for human rights across their value chains.

At the same time, regulatory gaps remain. For example, the EU Corporate Sustainability Due Diligence Directive (CSDDD), as adopted in 2024, excludes from its scope the downstream relationships of financial institutions, such as the lending and investment portfolios of banks. This is a missed opportunity to codify due diligence expectations where they are most urgently needed.

Looking Ahead: Banks Cannot Wait for Legal Certainty

The absence of binding obligations in certain areas does not exempt banks from fulfilling their responsibilities under the UNGPs and the OECD Guidelines. On the contrary, existing soft law instruments, international guidelines, and case-based knowledge provide a strong foundation for action.

In addition to the OECD Guidelines, sector-specific resources developed by organizations like Shift and BSR offer practical tools for financial institutions. Furthermore, growing empirical knowledge highlights the ways in which climate action and energy transition projects can negatively interact with the rights of workers, communities, and Indigenous Peoples.

For instance, cases of “just transition litigation” now emerging in multiple jurisdictions shed light on the “red flags” banks should be aware of when deciding to invest in energy transition projects. These cases emphasize that:

– No one should bear a disproportionate burden for climate action;

– Procedural justice (including participation and consent) is as crucial as distributive justice;

– Ignoring affected communities creates sacrifice zones and undermines the legitimacy of climate action;

– Failure to conduct just transition due diligence can lead to reputational, legal, and financial consequences.

Conclusion: From Risk to Responsibility

Banks’ understanding and implementation of human rights responsibilities is still insufficient. A just transition is not just about greening portfolios – it’s about embedding human rights at the core of climate finance.

Investment in the energy transition, if carried out without integrating human rights due diligence, risks locking in patterns of exploitation and inequality, linking the bank to human rights abuses and negative environmental impacts. Evidence of this contradiction is mounting, and communities are increasingly asserting their rights through legal and political channels.

To truly support a just transition, banks must act by internalizing their human rights responsibilities, integrating environmental and social risks, and adopting a holistic due diligence approach. Only then can financial institutions become credible allies in the fight for climate justice.