The Investment Risks of UK Banks' Continued Fossil Fuel Exposure

The UK's largest banks-Barclays, HSBC, Lloyds, and NatWest-have long positioned themselves as stewards of sustainable finance, pledging to achieve net-zero emissions by 2050. Yet, according to an InfluenceMap report, these institutions collectively allocated £119 billion to fossil fuel projects between 2020 and 2024, nearly double the amount invested in clean energy initiatives during the same period. This misalignment between public commitments and private actions raises urgent questions about the long-term viability of their current strategies, particularly as regulatory scrutiny intensifies and climate risks crystallize into financial liabilities.

Strategic Asset Reallocation: A Misaligned Portfolio

The core issue lies in the persistent overexposure to fossil fuels. Barclays, for instance, financed fossil fuel projects at a ratio of 1.8 to 1 compared to green investments in 2024, as ResponsibleUS reports, while Lloyds and HSBC allocated 3.1 and 2.9 times more capital to fossil fuels, respectively, in an InfluenceMap press release. Such imbalances contradict the International Energy Agency's (IEA) Net Zero by 2050 Scenario, which warns that new fossil fuel projects are incompatible with limiting global warming to 1.5°C, as summarized by JustMoney. By continuing to fund oil and gas expansion, these banks are locking themselves-and their investors-into a high-emission trajectory that risks asset stranding as demand for carbon-intensive energy wanes.

The Banking on Climate Chaos report underscores this danger, revealing that the world's top 65 banks, including UK institutions, committed $869 billion to fossil fuel projects in 2024 alone. This trend is not merely ethically contentious; it is economically precarious. Fossil fuel assets face declining demand, regulatory penalties, and technological obsolescence, all of which could erode returns. For example, the Rosebank oil field expansion in the North Sea, supported by NatWest, has drawn criticism, as KnowESG reports. Even banks with relatively greener profiles, like NatWest, remain vulnerable to reputational and legal risks if their indirect financing mechanisms continue to prop up fossil fuel operations, as highlighted in a BankTrack article.

Regulatory Pressures: A Tipping Point?

The UK Prudential Regulation Authority (PRA) has signaled a shift in expectations, proposing updated climate risk management frameworks in its April 2025 PRA consultation. The PRA now demands that climate risk be embedded in governance structures, with boards directly accountable for reviewing material risks and aligning risk appetite statements with science-based scenarios (CP10/25). This marks a departure from the 2019 guidance (SS3/19), which treated climate risk as a peripheral concern.

Yet, banks have resisted these changes. Barclays and HSBC, for instance, lobbied against stricter definitions of credible net-zero transitions, arguing for flexibility in what constitutes "green" financing, as ResponsibleUS reported. Such resistance is shortsighted. The PRA's emphasis on scenario analysis and data governance reflects a global trend toward transparency, as seen in the EU's Sustainable Finance Disclosure Regulation (SFDR) and the U.S. SEC's climate disclosure proposals. Failure to adapt could result in higher compliance costs, investor divestment, and reputational damage.

Moreover, the PRA's focus on "conservative assumptions" in risk assessments suggests regulators are preparing for worst-case climate scenarios. This could force banks to write down fossil fuel assets prematurely, compounding losses. For example, Lloyds' 7.3% exposure to fossil fuels in 2024, according to an Edie report, may soon be deemed incompatible with its risk appetite if regulators mandate stricter alignment with IEA benchmarks.

Conclusion: A Call for Urgent Reallocation

The UK's banking sector stands at a crossroads. While NatWest's 1.5:1 green-to-fossil fuel investment ratio offers a glimmer of hope, the broader industry's reliance on carbon-intensive assets remains a systemic risk. Investors must weigh not only the immediate profitability of fossil fuel financing but also the long-term implications of stranded assets, regulatory penalties, and shifting market dynamics.

For banks, the path forward requires more than greenwashing. It demands a radical reallocation of capital toward renewable energy, energy efficiency, and climate-resilient infrastructure. For regulators, it necessitates enforcing science-based definitions of sustainability and closing loopholes that allow indirect fossil fuel financing. As the PRA's CP10/25 consultation makes clear, the era of treating climate risk as an afterthought is over. The question is whether UK banks will adapt-or be left behind.