Climate Insight Series
Throughout our Climate Insight series, we have explored the challenges and opportunities facing the real economy as it transitions to a low-carbon future.
In this concluding article, we examine the role of financial institutions, particularly banks and insurers, and how their financing, investment and underwriting decisions can both accelerate and hinder progress towards net zero.
The role of financial institutions
Banks and insurance companies are essential to the global economy. They facilitate the flow of capital to households, businesses and governments, while helping individuals and organisations manage financial uncertainty. Together, they underpin economic activity by enabling investment and helping society absorb and recover from financial shocks.
As the world transitions to a low-carbon economy, these institutions also have a critical role to play in mobilising the trillions of dollars of investment needed for clean energy, sustainable infrastructure and climate resilience. Through their lending, underwriting and investment activities, banks and insurers can help accelerate the transition by directing capital towards low-carbon solutions, supporting emerging technologies and strengthening climate risk management across the economy.
Banks: the kings of capital allocation
Banks can influence the pace of the transition through their capital allocation decisions, helping shape the future economy by directing finance towards companies with strong transition credentials and emerging low-carbon technologies. At the same time, they can reduce financing for businesses whose activities remain misaligned with climate goals. In theory, this should make financing costs cheaper for businesses supporting the transition and more expensive for those that do not.
When assessing a bank's climate strategy, we generally focus on three key areas:
Measuring and managing financed emissions
The foundation of any climate strategy is measurement and disclosure. Put simply, organisations cannot manage what they do not measure. Financed emissions reporting helps banks, regulators and investors understand where climate-related risks are concentrated within their lending and investment portfolios. Many large banks now provide extensive financed emissions reports, particularly in Europe where disclosure requirements are more developed.
The next step is target-setting. Guided by initiatives such as the Net Zero Banking Alliance, many banks have adopted sector-based emissions reduction targets covering high-impact sectors including oil and gas, power generation and automotive manufacturing. They often benchmark these targets against external climate scenarios, often from the International Energy Agency (IEA).
Setting emissions reduction targets is an important first step, but their credibility ultimately depends on how they will achieve those targets. Robust transition plans should demonstrate how banks intend to work with clients, allocate capital and manage portfolio exposures in ways that support achieving their targets.
This distinction matters because banks can reduce their reported financed emissions by simply shifting away from high-emitting sectors, without necessarily helping to cut emissions in the real economy.
Supporting the growth of low-carbon finance
Alongside reducing emissions associated with financing activities, banks can also increase the flow of capital towards low-carbon solutions. Many banks have made large headline commitments to sustainable finance. However, relatively few have established dedicated green or climate-specific financing targets, and fewer still have adopted sector-level targets equivalent to those used to measure financed emissions reduction.
Nevertheless, disclosure against sustainable finance targets is improving. Banks are increasingly providing more detail on the types of activities they finance, giving investors and other stakeholders greater visibility into how capital is supporting the transition.
Progress, but capital still misaligned
Targets and disclosures tell only part of the story, though. Investors must also assess how the banking sector is performing in practice and where it is actually directing capital.
One useful indicator is the Energy Supply Financing Ratio (ESFR), which compares financing and investment directed towards clean energy relative to fossil fuels. Under the IEA's Net Zero Emissions by 2050 Scenario, fossil fuel investment must decline substantially while clean energy investment needs to increase significantly by 2030. This implies an ESFR of approximately 6:1. This means that for every dollar invested in fossil fuels, six dollars should be invested in clean energy.
Research by Reclaim Finance1 covering 65 of the world's largest banks between 2021 and 2024 found that these institutions, on average, allocated more than twice as much financing to fossil fuels as they did to clean power. Only 14 banks, predominantly European institutions, financed more clean energy than fossil fuels, and just two achieved a ratio above 6:1.
Source: Banking on business as usual: The energy finance imbalance report by Reclaim Finance.
While financing for renewable energy has increased in many cases, fossil fuel financing has not declined at the required pace. Indeed, during 2025, the 65 largest global banks increased fossil fuel financing by 8%, while financing dedicated to fossil fuel expansion grew by 27%2. These figures suggest that despite progress in some areas, capital allocation remains significantly misaligned with a net-zero pathway.
Exclusions matter: limiting fossil fuel financing
Alongside target setting and disclosure, exclusion policies have become another important component of banks' climate strategies. These policies seek to limit financing for certain fossil fuel activities, particularly coal. While some banks have strengthened such policies over time, others have scaled back commitments in recent years. Moreover, many existing policies remain less stringent than a net-zero pathway requires.
A key question is whether these policies have meaningful real-world impacts.
A 2024 study by researchers at Harvard Business School3 examined the consequences of coal financing exclusion policies adopted by banks. It found that banks with stronger exclusion policies provided substantially less financing to coal companies than their peers. More importantly, these policies also made it harder for affected companies to raise capital, with limited evidence that they could simply replace withdrawing lenders with other sources of finance.
The study also found evidence that companies most exposed to these exclusion policies were more likely to decommission coal-fired power plants. The key conclusion was that exclusion policies can have tangible effects when they are comprehensive and effectively implemented. Far from being symbolic commitments, well-designed policies can influence capital availability and contribute to the managed decline of high-carbon activities.While Banks are central to deciding which activities receive capital, capital is alone is not enough. Many projects also need insurance before they can be financed, built or operated. This gives insurers a parallel form of influence on the transition through their underwriting choices.
Insurers and the transition: the power of underwriting
Insurance is fundamental to both economic activity and the energy transition because it enables companies to manage risk and undertake investment. For large infrastructure and energy projects, insurance is often a prerequisite for securing financing, as lenders typically require adequate coverage before providing capital. Alongside banks, insurers are critical in determining which projects ultimately proceed.
The insurance sector also faces increasing pressure from climate change itself. Natural catastrophe losses continue to rise and are expected to reach hundreds of billions of dollars globally in a typical year. Insurers can respond through pricing adjustments or, in some cases, by withdrawing coverage. However, increasingly volatile and extreme weather patterns make these risks harder to model and price accurately.
Underwriting: a key transition lever
Many of the themes affecting banks are equally relevant to insurers. However, disclosure of underwriting emissions, often referred to as Insurance Associated Emissions, remains less developed than disclosure of financed emissions. Standardised methodologies emerged later and insurers continue to face significant challenges in obtaining consistent data from insured entities.
As a result, target setting for underwriting emissions remains relatively uncommon.
An insurance-sector equivalent to the ESFR would compare premiums generated from clean energy activities with those received from fossil fuel activities. Like the banking sector, available evidence4 suggests that most of the world's largest insurers continue to generate more premium income from fossil fuel-related business than from renewable energy activities.
Exclusion policies for insurers
Like banks, many insurers have introduced exclusion policies that restrict underwriting for certain fossil fuel activities, particularly coal. These policies have become increasingly common and more stringent over time. Research published by the University of Zurich5 in 2026 found that by 2023 around 80% of major insurers had adopted some form of coal underwriting restriction. However, only a minority had implemented comprehensive coal phase-out strategies.
Adoption has been strongest among insurers headquartered in jurisdictions with more ambitious climate policies, while coal restrictions remain generally more developed than equivalent policies covering oil and gas activities.
Importantly, the study shows that these policies can have tangible real-world impacts. Insurers that adopted coal underwriting restrictions reduced coverage for coal mines and were less likely to maintain existing insurance relationships. While implementation remains uneven and some insurers have continued to underwrite coal-related activities despite public commitments, replacement cover from other insurers only partly made up for the withdrawn coverage.
Given that insurance is often a prerequisite for operating a mine, the researchers found that affected mines were more likely to face operational constraints and ultimately be abandoned. The findings suggest that much like bank financing exclusions, effective underwriting restrictions can reduce the availability of capital and risk capacity for high-carbon activities, supporting the transition away from coal.
Conclusion: financial institutions as transition catalysts
Banks and insurers occupy a unique position in the transition to a low-carbon economy. Unlike most companies, their influence extends far beyond their own operations through the financing, investment and underwriting decisions they make every day.
Research on both bank lending and insurance underwriting indicates that well-designed fossil fuel exclusion policies can reduce access to capital and insurance for high-carbon activities, making it more difficult for new projects to proceed and accelerating the phase-out of existing assets.
However, the overall picture remains mixed. While disclosure, target setting and sustainable finance commitments have become increasingly common, capital flows remain far from aligned with a net-zero pathway. Many financial institutions continue to finance fossil fuel expansion, and implementation of climate commitments is uneven. For investors, this underlines the importance of looking beyond headline pledges and assessing the credibility of transition plans, the strength of exclusion policies, and evidence of real-world delivery.
Ultimately, the financial institutions making the greatest contribution to the transition will be those that not only manage their own climate-related risks but also direct capital and provide the insurance and risk-transfer solutions needed to build a resilient, low-carbon economy.
1. Banking-on-business-as-usual.pdf
3. draft_Coal_divestment_7a4fa45e-b0db-480c-a805-ccca05efc23b.pdf
4. Scorecard - Insure Our Future Global
5. Insurers' Underwriting Policies by Olimpia Carradori, Felix von Meyerinck, Zacharias Sautner :: SSRN
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