Carbon Tracker Initiative                            FSUK0040

Additional written evidence submitted by Carbon Tracker Initiative


Further Carbon Tracker Analysis for the Environmental Audit Committee

Jonathan Sims, Maeve O’Connor, Amy Owens, Richard Folland


Analyst Report | June 2023

Carbon Tracker Initiative                            FSUK0040

About Carbon Tracker             

The Carbon Tracker Initiative is a team of financial specialists making climate risk real in today’s capital markets. Our research to date on unburnable carbon and stranded assets has started a new debate on how to align the financial system in the transition to a low carbon economy.


About the Authors             

Jonathan Sims Senior Analyst, Power & Utilities

Jonathan has worked in the Power & Utilities team at Carbon Tracker since April 2021. He has lead- authored the reports Put Gas on Standby” (2021) and “Stop Fuelling Uncertainty” (2022) focused on the risks of continued investment in gas-fired power stations globally, as well as Marginal Call (2023) exploring the UK’s options for future power market design. Prior to joining CTI, he spent eight years with commodity and energy sector-focused business intelligence provider Argus Media, where he initially worked on power trading analysis before leading the company’s emissions markets coverage.

Maeve O’Connor Associate Analyst, Oil, Gas & Mining

Maeve joined Carbon Tracker’s Oil, Gas & Mining in 2022. She has authored reports including “Absolute Impact” (2022) on oil and gas company emissions targets, “Crude Intentions” (2022) on executive remuneration policies, and most recently, “Missed Pitch” (2023), on asset managers investments in the oil and gas sector. Prior to joining CTI, she worked at the European Central Bank where her focus was on the development of eurozone financial market policy. She has a background in commercial finance, having previously spent two years working in corporate finance and in trading at Bank of Ireland.

Amy Owens – Research Associate, Finance & Net Zero Energy Transition

Amy joined Carbon Tracker in 2021. Before joining Carbon Tracker, she worked as a Senior Public Affairs Executive in a membership organisation representing the publishing industry, leading on public affairs and sustainability work. She won PRWeek’s CCPA Public Affairs Newcomer of the Year Award in 2020. She holds a master’s degree in International Security from Bristol University, where she also studied a bachelor’s degree in Politics and International Relations.

Richard Folland – Head of Policy and Engagement

A long-time British diplomat and former Head of International Energy Policy for the British Government, Richard was also JPMorgan’s European Climate and Energy Policy Advisor for over a decade. He has advised Carbon Tracker on policy and government relations since 2014, and joined the staff on 1 January 2023.



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© Carbon Tracker 2023.

Carbon Tracker Initiative                            FSUK0040

Table of Contents

Key Takeaways              1

Introduction              2

Theme 1 - Fossil Fuel Exclusion Strategies              3

Theme 2 “Policy-takers, not Policymakers”              6

Theme 3 Energy Security-Washing              8


Key Takeaways





Carbon Tracker Initiative is an independent financial think tank that carries out in-depth analysis on the impact of climate risk and the energy transition to help markets and state actors align capital allocation with the finite carbon budget predicated by the need to keep global warming within 1.5°C.

Building upon the analysis submitted to the Environmental Audit Committee (EAC) in Autumn 2022 - which reviewed the letter responses by financial institutions1 addressing the Committee’s questions on fossil fuel finance and the IEA’s net zero scenario Carbon Tracker welcomes the opportunity to act as an ongoing advisor and present further insights to support the inquiry.

In this submission, we have focused on providing the Committee with a thematic deep dive on the common topics identified in the letter responses received from financial institutions last year. The report is divided according to the themes which emerged from the responses, which are:





























1 This research document, as well as the previous Carbon Tracker EAC submission, is based on the letter responses received by the Committee as part of the inquiry into the net zero transition and private finance. We acknowledge that not all letter respondents replied to the EAC’s inquiry, so our analysis is based on financial institutions that responded to provide insights on their business strategies towards the net zero transition. We also note that the institutions’ policies may have changed in the time since they were described by respondents in their letters. All letter responses are available on the EAC’s website.




Theme 1 - Fossil Fuel Exclusion Strategies

The need to end fossil fuel expansion to avoid the most catastrophic effects of climate change has been evidenced by scientists and increasingly emphasised by world leaders. UN Secretary General Antonio Guterres told the World Economic Forum in 2023 that any fossil fuel producers and their “enablers” which are still pressing ahead with plans to expand production do so “knowing full well that their business model is inconsistent with human survival”.2

Among these key “enablers” are the financial institutions that continue to direct finance towards the fossil fuel industry. These institutions often claim to be taking active steps in implementing sustainable criteria to their business functions, and support for net zero emissions by 2050 climate targets, yet their actions are contradictory to these stated intentions.

Against this background, only a small minority of respondents to the EAC inquiry identified firm fossil fuel exclusion policies. Aviva, Axa Group3 and Stewart Investors scored the highest in this regard.




Box 1: Highest Scoring Fossil Fuel Exclusion Policies

Stewart Investors

Stewart explicitly stated that “long-term sustainability headwinds for fossil fuel companies

carries significant risks that we are unwilling to expose our clients’ capital to”, presenting an accurate picture of the reality that investment in such firms offers no long-term value and will lead to significant losses given the declines in production that the energy transition will drive.


Aviva stated that it will completely divest its remaining interests in any company that generates more than 5% of revenue from either the extraction or burning of thermal coal, as well as any company making more than 10% of revenue from oil sands or Arctic drilling, although the investor does not identify specific exclusion that targets oil and gas expansion. Aviva’s insurance arm no longer insures:

Axa Group

Axa identified commitments to ending investment into and the underwriting of new upstream oil exploration projects, adding to previously made commitments of divesting from coal and to introduce restrictions on oil sands activities for its insurance business.




2 Davos 2023: Special Address by Antonio Guterres, Secretary-General of the United Nations - WEForum

3 We note that Axa Group withdrew from the Net Zero Insurance Alliance in May 2023, albeit the investor remains a member of GFANZ via its membership of the Net Zero Asset Owners Alliance.




There have also been some signs of promise in the banking sector on fossil fuel exclusion over the past year, with HSBC and Natwest announcing restrictions on direct support for new projects in December 2022 and February 2023 respectively.

Exemptions threaten to undermine the robustness of exclusion policies

Even where financial institutions have enforced fossil fuel exclusion policies, exemptions or loopholes threaten to undermine their robustness, however. One respondent said that it exempts fossil fuel-involved companies from its exclusion policies if they are deemed to be “serious about the transition out of high carbon fuels” and are considered intent on aligning their operations with the Paris Agreement; while another similarly stated that it continues to allow for investment or underwriting into the fossil fuel sector if companies have “far-reaching and credible transition plans” in place.

While acknowledgement of the need for companies receiving investment or insurance services to have credible transition plans in place is valid, the responses are vague in how to measure “credibility”. Similarly in the banking sector, some lenders’ restrictions on fossil fuels are limited to project-level only, leaving open the possibility of continued funding for oil and gas firms via non-project corporate financing.

The letter responses from banks were generally inconsistent when it came to the exclusion criteria applied when lending to fossil fuel companies. Most appear to focus their exclusion on companies active in the thermal coal sector with minimal reference to oil and gas. Where restrictions are identified on lending to oil and gas companies, they tend to only apply to the exploration of new fields, rather than the exclusion of firms intent on expanding production at existing sites.

One large multinational bank suggested that it would only apply fossil fuel exclusion when the “[financial] risks are deemed to merit exclusion”, indicating that this continues to override any environmental concerns or obligations.

Reluctance to dictate direction of capital for clients

Other financial institutions to have responded were far less open to the adoption of fossil fuel exclusion policies at all and appear to be continuing to direct finance towards companies engaging in fossil fuel- related activity, despite many claiming to be supportive of net zero by 2050 ambitions.

One large investment management company that responded suggested that it needed to provide a broad portfolio of companies for investment to its clients and that it expected “to remain long-term investors in carbon-intensive companies, because they play crucial roles in the economy”, claiming that divestment from such firms in the near term “may be at odds with enabling an orderly transition to a low-carbon economy in the long term”.

Other company respondents similarly stated that they did not believe in dictating to their clients where to direct capital investment and have consequently opted against imposing firm-wide fossil fuel exclusion policies. Instead, they have chosen to create certain sustainable funds which contain limits and exclusions for investment into polluting companies.




Some financial institutions see fossil fuel investments as a means to participate in the energy transition...

Some respondents justified the absence of fossil fuel exclusion policies and continued investment in the sector by claiming that acquiring equity in companies engaging in fossil fuel-related activities allows financial institutions to influence and therefore contribute towards putting such companies on a pathway to 1.5˚C alignment. One large global asset management company which responded claimed that this “transition investing” was part of its commitment to net zero 2050 as a signatory of the Net Zero Asset Manager initiative.

This same asset manager went on to say that it is important to “go where the emissions are”, and to make capital available to any industry with a viable transition plan, without identifying the criteria that would confirm this viability.

One other global investment firm to respond presented a similar view in claiming that continuing to finance companies actively involved in the fossil fuel sector will help drive the changes required to deliver net zero 2050 and that restricting their access to capital is “not supportive of the net zero transition”. However, the response did not confirm how the investment company intends to monitor the use of funds directed towards firms engaging in fossil fuel-related activity, suggesting there is minimal guarantee that capital will be used for green project purposes.

...while others favour “engagement over exclusion”

Some respondents to the inquiry used the claim of actively engaging with fossil fuel companies to justify their continued investment into such polluting firms, suggesting that by taking an active climate stewardship approach to push the decarbonisation of operations, they would be making a greater contribution towards net zero 2050 delivery than through divestment or the enforcement of fossil fuel exclusion policies.4

One asset management company to disclose this approach has enforced some exclusion on firms generating more than 20% of revenues from thermal coal mining, although even its “sustainable” fund options allow for investment in companies receiving up to 30% of revenues from coal-fired power generation. The asset manager suggests in its response that maintaining investment in fossil fuel companies allows it to “participate in the transition” and that “staying invested while using our influence to accelerate progress” can enable its clients to benefit from the value that the transition can unlock.

One approach that some financial institutions claim to take which could strike a balance between engagement over the need to decarbonise and fossil fuel exclusion, is to commit to divestment if engagement with the polluting firm is deemed to be unsuccessful. Limited detail is provided in the responses on the length of time permitted for a fossil fuel-focused organisation to align its operations with the goals of the Paris Agreement5 before divestment is resorted to, however.






4 For a full discussion on asset manager’s climate stewardship efforts with oil and gas companies see Missed Pitch – Carbon Tracker (2023).

5 Carbon Tracker has outlined the requirements for Paris alignment for oil and gas companies in terms of production and sanctioning decisions (see Paris Maligned), emissions targets (see Absolute Impact 2022), executive remuneration policies (see Crude Intentions).




Theme 2 “Policy-takers, not Policymakers”

While many financial institutions claim to now vocally support the IEA’s net zero by 2050 scenario, a common theme which emerged from company responses to the EAC inquiry into the financial sector and the UK’s net zero transition is that these companies do not believe it is their role to independently drive the action needed to deliver this target.

Claims of being “policy-takers not policymakers” were consistent across many responses, which in itself suggests that the UK Government has not yet put into place a strong framework for delivery to incentivise private sector action.

Questions over the UK Government’s approach and plan to deliver its legally binding net zero emissions by 2050 target have been raised consistently over the past year. The High Court deemed the strategy to be unlawful in a case brought forward by Friends of the Earth, ClientEarth and Good Law Project6 in July 2022. An independent review published in January 2023 into the planned delivery of net zero, led by MP Chris Skidmore, presented no fewer than 129 recommendations for government to help “materially improve the UK’s approach to net zero”.7

Respondents are awaiting directions from government, but are receiving mixed messages

on the UK’s fossil strategy

This passive approach to net zero delivery is seemingly being felt by financial institutions, which largely at least claim to be awaiting direction from policymakers before acting to align their company strategies with net zero pathways. Mixed signals from government in recent years on climate policy have also made it harder for investors to have long-term visibility and certainty on the direction of travel. The launch of a new licensing round for North Sea oil and gas exploration last year8 will have done little to convince investors of policymakers’ intent to ensure net zero delivery, nor the approval of a new coal mine at Whitehaven in Cumbria.9

One response from a major insurance company argues that it is difficult for investors wishing to align their capital allocation with net zero unless policymakers align incentives with the delivery of this target. This point of view is echoed across other responses, with financial institutions largely suggesting that they are only likely to work to align their strategies with net zero 2050 aims if the structure for delivery is first put into place by policymakers.

A major investment company to respond stated that “it is the role of governments, not industry bodies or investors, to set the targets that private sector actors should pursue”, before adding that asset managers’ role is to then judge how companies’ long-term prospects will be impacted by changes in government regulation.

Boosting investor confidence in the low-carbon sector requires an acceleration of government initiatives

Related to this are the frameworks and incentives which government can put into place to direct capital away from fossil fuels and towards green initiatives. Policymakers have had success in recent years with


6 Govt’s climate strategy deemed “unlawful” in historic ruling Friends of the Earth

7 Mission Zero Independent Review of Net Zero

8 UK offers new North Sea oil and gas licences despite climate concerns The Guardian (07/08/2022)

9 UK’s first new coalmine for 30 years gets go-ahead in Cumbria The Guardian (02/12/2022)






the roll-out of support mechanisms for low-carbon infrastructure build, such as the UK’s Contracts for

Difference scheme, and in the use of carbon pricing to force coal power generation off the system.


One global investment firm called on policymakers to bring forward more incentive initiatives like this to boost investor confidence in the low-carbon sector and to make clearer the case for diverting capital away from companies that continue to engage in fossil fuel expansion. The firm suggests that, while financial institutions have an important role to play in helping to deliver net zero targets, the first moves need to come from government. “The financial sector has a lot of work to do to help achieve government and industry net zero commitments, but the financial sector alone cannot achieve these commitments. We need policy measures to support the mobilisation of investment into green and transitional activities” it said.

Clearer direction over the delivery of the Government’s net zero 2050 target therefore seems required to convince financial institutions of the UK’s alignment with the goal. Chris Skidmore’s review into the target urged UK Government to ensure cross-department coordination in bringing forward the measures to deliver what is an economy-wide goal and to ensure long-term investor confidence by ending the “policy incoherence” which has been seen in the past.




Theme 3 Energy Security-Washing

Energy security has become more central to energy policy discussions since the Russian invasion of Ukraine. Oil and gas companies have used10 the crisis to attempt to cement their position as energy providers and justify their continued production of fossil fuels. This narrative (which could be viewed as “energy security washing”) has clearly made inroads with the financial community – in the letter responses, several banks and asset managers cited “energy security risks” as justification for their continued investment in fossil fuel expansion.

Matters of energy security are for governments, not financial institutions, to decide…

As we have seen, many respondents consider themselves to be policy-takers, not policymakers, when it comes to achieving net zero goals. On matters of energy security, however, certain respondents provided their own view on the policies required to achieve energy security. One large asset manager said, “To ensure continuity of affordable energy supplies through [the energy transition], traditional fossil fuels like natural gas will be required”.

It is worth noting in this context that the UK has already achieved a large degree of energy independence, with the role of fossil fuels declining in recent years: in 2022, 56% of the nation’s electricity generation came from renewable and nuclear sources.11 Granted, gas still holds an outsized share (39%) of total energy consumption, but over 50% of all gas consumed is sourced domestically, with most of the rest imported from Norway, a geopolitically stable trading partner.12 Domestically produced oil, on the other hand, has little to no role to play in achieving energy security: c. 80% of it is exported, as the type of oil is not suitable for the UK’s energy system.13

And they need to be balanced with climate considerations.

Many countries including the UK have announced their intentions to become energy exporters to reduce reliance on energy trade relationships which could pose risks to national security.11 However, the growing imperative to reduce global emissions means that not all countries can become net exporters of oil and gas. Achieving the energy trilemma of security, affordability, and sustainability will instead require an accelerated deployment of low-cost, domestically generated renewable assets. The UK Government recognised this in its Powering Up Britain report.14

Financial institutions are ill-prepared for the impacts of declining demand for fossil fuels...

The energy transition has begun, and fossil fuels are experiencing demand substitution from new technologies (e.g., electric vehicles and renewable energies), which is being accelerated by policy action on climate. Upstream assets like oil and gas wells are exposed to transition risk from the collapsing demand for their fossil outputs, which could impact their future revenue streams. These risks are amplified for newer projects: mature fields which are nearing the end of their productive lives are less exposed to demand declines further out in the future.

Upstream assets experience natural declines as their resources are extracted, which means that they are less likely to need to be retired early. Where the risks for upstream producers lie is in the fact that

10 Revealed: BP’s ‘greenwashing’ social media ads as anger over fuel costs rose – The Guardian (06/08/2022)

11 Energy Trends Department for Energy Security and Net Zero

12 Trends in UK Imports and Exports of Fuels - ONS

13 Why drilling for more fossil fuels won’t bring UK energy security or cut prices Carbon Tracker

14 Powering Up Britain - UK Government







exhausted fields are unlikely to need to replacements. Indeed, not investing in new fields is crucial if we are to meet climate goals: the International Energy Agency (IEA) has stipulated that no new conventional, long-term oil and gas fields can be developed if global temperature warming is to be contained to 1.5˚C.15

including the potential early retirement of fossil assets

None of the financial institutions surveyed indicated that they have a policy on responsible asset retirement. One of the better answers, from Phoenix Group, said that it has a “set of expectations” for companies based on the work of TCFD, TPI, and CA100+, which directs dialogues with companies on issues, including fossil asset retirements. Another respondent, Citi Bank, stated that they recognised the need for early retirement of carbon-intensive assets, in their contribution to a GFANZ report entitled “the Managed Phase-out of High Emitting Assets”.

The absence of policies on responsible asset retirements is a weakness in financial institutions’ preparedness for the energy transition. The acceleration of the transition and concurrent decline in demand for fossil fuels could see the early retirement of many fossil assets. Asset retirements and their associated liabilities carry significant financial risks: retiring projects sooner than the time expected at the point of investment could impact returns via i) the decommissioning costs (or “decommissioning liabilities”) incurred at the point of retirement; and ii) prematurely retired assets may generate lower than expected revenues over the course of their productive lives. In the case of fiduciaries like asset managers, these lower returns will be passed on to the ultimate asset owners, like pension funds and retail investors.

Asset retirement does not have a one size fits all solution: risks differ between fossil industry segments

Asset retirement policies should recognise the particular risks faced by different segments of the industry. While Upstream assets are less likely to be retired early, Mid- and Downstream investments are effectively energy infrastructure (pipelines, refineries, fossil fired power generation plants etc.) and their economic value depends on demand for their services.

Midstream assets often operate via contracts which may insulate operators to an extent, but ultimately the combination of lower volumes, higher costs, and supressed commodity prices add up to a risk of asset stranding, particularly for non-regulated assets.16 Downstream assets are at risk from both falling supplies of throughputs (e.g., crude oil for refineries) and falling demand for their outputs. Companies have already come to this realisation, as evidenced by the many refinery closures in recent years.17 To make matters worse, both mid- and downstream infrastructure can be difficult and costly to repurpose, increasing the likelihood of retirement.











15 World Energy Outlook 2022 - IEA

16 See Midstream Running Dry - Carbon Tracker (2022) for more details

17 Refinery Shutdowns Around the World RBN Energy





Carbon Tracker is a non-profit company set up to produce new thinking on climate risk. The organisation is funded by a range of European and American foundations. Carbon Tracker is not an investment adviser and makes no representation regarding the advisability of investing in any particular company or investment fund or other vehicle. A decision to invest in any such investment fund or other entity should not be made in reliance on any of the statements set forth in this publication. While the organisations have obtained information believed to be reliable, they shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages. The information used to compile this report has been collected from a number of sources in the public domain and from Carbon Tracker licensors. Some of its content may be proprietary and belong to Carbon Tracker or its licensors. The information contained in this research report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities within any jurisdiction. The information is not intended as financial advice. This research report provides general information only. The information and opinions constitute a judgment as at the date indicated and are subject to change without notice. The information may therefore not be accurate or current. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by Carbon Tracker as to their accuracy, completeness or correctness and Carbon Tracker does also not warrant that the information is





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June 2023