UK banks often come under scrutiny for their perceived role in financing of the fossil fuel sector, but our analysis shows the banks held across the Sustainable Future fund range have made significant strides in improving their policies, targets and ultimately supporting the transition to a more sustainable future.
UK banks’ fossil fuel exposure is minimal and falling
UK banks are not entirely free from fossil fuel exposure, but it is relatively minor within the context of overall loan books and not as significant as often portrayed by the media. Retail-focused banks, which we prefer within the sustainable investment process, typically have the lowest exposure to fossil fuels given their lending activities predominantly focus on mortgages.
The oil & gas sector loan book exposure for Lloyds and NatWest is less than 0.1% and 0.2% respectively, having been cut by 50% and 30% over the last year.
Even the larger commercial banks with far greater corporate loan exposure have relatively little exposure to fossil fuels. Banking behemoth HSBC has less than 2% of its almost $1 trillion loan book in oil & gas lending. Meanwhile, the often-scrutinised Barclays has even less at below 0.6%. The highest oil & gas loan book exposure of the UK banks held within the Sustainable Future fund range is Standard chartered at around 2.5%.
Promoting carbon reductions efforts in the sector
All these banks have committed to not finance any new oil and gas field projects or related infrastructure. They have also refused to provide services to oil and gas companies that do not set credible transition plans.
Oil & gas customers are required to deliver carbon emissions reductions aligned to the International Energy Agency’s Net Zero Emissions by 2050 pathway (with 2030 interim targets) for the energy sector in order to retain funding.
Of the UK banks held in the Sustainable Future fund range, Lloyds, HSBC, Barclays and Standard Chartered have all effectively reached or surpassed their 2030 targets already, having registered impressive financed emissions reductions of 69%, 46%, 45% and 28% respectively. Meanwhile, NatWest has also seen a more modest reduction of 10%, slightly behind the pathway required to reach its 2030 target.
Strong commitments to sustainable financing
It is also important to acknowledge the strides being made by these banks in growing their sustainable financing activities, be it energy transition, social financing initiatives such as affordable housing or a combination of green and social issues.
HSBC and Barclays have set industry-leading targets, aiming to facilitate $1 trillion of sustainable financing by 2030, a target which has since pushed other names within the sector to try to match them.
Standard Chartered is aiming to hit $300 billion of sustainable financing over the same timeframe.
Whilst their corporate lending is on a smaller scale, NatWest and Lloyds have targets to deliver £100 billion and £30 billion of sustainable financing by 2025 and 2026 respectively, having achieved around 90% of these targets already.
A proactive approach to energy transition and sustainable lending
While UK banks still have some very low exposure to fossil fuel financing, they have made concerted efforts to reduce involvement with carbon-emitting sources and to support the development of sustainable projects.
The media may sometimes generate eye-catching headlines from the banks’ minimal exposure to oil and gas, but it's important to acknowledge the positive steps being taken by these institutions to align their activities with climate goals and drive the energy transition to a low-carbon economy.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
- Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
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It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
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