Measuring what matters: Looking beyond the numbers

In case you missed it, our first blog explores why what’s easiest to measure in the energy transition isn’t always what matters most – and why nuance and judgement are key. Here we apply that lens to banks.

Assessing climate risk requires understanding how banks think about and manage risk, not just what their exposures look like today. Metrics are often backward-looking, while transition risk is inherently forward-looking and path dependent. As a result, we focus on how banks identify, assess and embed climate considerations into decision-making, rather than relying solely on static exposure data. This deeper analysis is applied selectively where most material and sits alongside systematic frameworks that enable consistent coverage across the wider investment universe. It is also important to note that while engagement with individual banks is important, climate risk remains systemic. Our assessment of company level risks and opportunities sits alongside a broader recognition for how capital allocation across the financial system can shape real-world outcomes, including the pace and orderliness of the energy transition.

Scenario analysis is a critical tool in this process, enabling banks to test resilience across different transition pathways. Widely encouraged by regulators and bodies such as the Network for Greening the Financial System (NGFS)[1], scenario analysis allows banks to explore how portfolios may perform under orderly, disorderly or delayed transitions. While these exercises are complex and assumption driven, they provide valuable insight into how institutions understand uncertainty and potential downside risks.[2] 

When considering ‘dial-mover’[3] companies, we complement systematic assessment with deeper analysis of policies, governance and engagement outcomes. This includes sector specific lending policies, transition finance frameworks, engagement and escalation mechanisms and the integration of climate considerations into credit decisions. As reflected in L&G’s stewardship approach, combining quantitative scoring with qualitative overlays, where applicable, allows for a more robust and realistic assessment of both risk and opportunity.

Engagement is a central pillar to our approach, both as a source of insight and as a tool for driving change. We believe that working constructively with companies can support both improved risk management and real‑world emissions reductions. L&G’s long history of stewardship reflects the view that sustained dialogue – supported by clear expectations and, where necessary, escalation – can support long-term value creation and shape the future by encouraging more sustainable, long-term practices from companies.

Assessing transition risk in practice – Barclays* We have engaged extensively and proactively with Barclays* over many years on climate risks and opportunities. This has informed our ongoing assessment of its governance, sector-specific policies and use of climate scenario analysis. Barclays* has consistently shown receptiveness to our engagement and challenge. For example, following a climate-related shareholder resolution at Barclays’* 2020 AGM that we supported, the bank advanced its climate management, including disclosure of its BlueTrackTM carbon assessment methodology. More recently this has been supplemented with leading work assessing nature-related financial risks. A further area of engagement has been how Barclays* supports its clients through the transition. An effective framework can be used to assess clients, inform engagement priorities and manage transition risk for both clients and the bank. We are pleased to see the scope of their Client Transition Framework (CTF) was extended for 2025, alongside more detailed public disclosures – for example providing greater transparency on how clients’ businesses models may align with a low-carbon economy over time and across sectors. Frameworks like this CTF are important not only for risk management, but also for identifying opportunities linked to the transition. Barclays has also provided additional disclosures in its Transition Update, for example reporting that lending to clients utilising sustainable and transition finance products has been associated with higher average returns. While no bank’s approach is ever perfect, we recognise Barclays’* transparency and thoughtfulness in approach – qualities that matter in practice but are not always visible in headline metrics alone.

 

The limits of aggregate fossil fuel metrics

If we are to achieve a Paris-aligned decarbonisation pathway to help manage systemic climate risks, both the demand for – and supply of – coal, oil and ultimately even natural gas undoubtedly need to fall. It follows that companies overinvesting in new capacity today – especially if positioned relatively high up the supply curve once adjusting for carbon costs that aren’t fully priced, and or has a long-expected lifetime – may leave investors exposed to financial risks. These are often referred to as “stranded asset” risks. If energy companies that invest in such projects may be creating financial risk, it also follows that banks financing these projects may also be enabling similar risks.

Aggregate fossil fuel lending is often used as a shorthand for assessing banks in this context. However, we believe it is an insufficient indicator of both financial risk and real-world impact on its own. While such metrics are simple and intuitive, they risk obscuring important distinctions and can lead to conclusions that are directionally appealing but analytically flawed. We see three key limitations in relying solely on these metrics as a primary assessment tool:

1. Detail matters: not all ‘fossil fuel’ finance is the same. If metrics are too crudely designed, they can fail to capture critical differences in the nature and risk profile of lending. They may not distinguish between new and existing supply, between project finance and general corporate lending, or between short-dated and long-dated exposures. They can also ignore differences in cost competitiveness, emissions intensity and asset lifespan, all of which are central to understanding stranded asset risk. Conversely, some banks may continue to facilitate fossil fuel financing via off-balance sheet activities (such as syndicated loans and bond underwriting) which would not be capture by measures focused primarily on lending.

2. Effectiveness matters: capital does not disappear, it reallocates. Reducing lending by a subset of banks does not necessarily reduce fossil fuel supply if demand for capital persists.[4] Financial markets are adaptive, and in many cases capital is re-provided through alternative channels, including private markets or less regulated institutions.[5] This can reduce transparency, weaken standards and limit investor influence over real economy outcomes. We believe it is better for financing to be sourced from institutions that are managing risks responsibly and engaging with stakeholders.

3. Systemic outcomes matter: supply should align with demand. Focusing on supply-side restrictions in isolation risks undermining an orderly and fair transition. Abrupt or poorly coordinated reductions in supply can lead to price volatility, economic disruption and regressive impacts, potentially triggering political backlash that slows progress overall. Most credible transition pathways emphasise that demand reduction, clean energy deployment and managed supply decline should occur together.[6]

Importantly, there are exceptions where supply‑side constraints are clearly justified. High‑cost, high‑carbon resources, such as oil sands, are difficult to reconcile with most credible net‑zero pathways and are more likely to result in stranded assets. These cases reinforce the need for targeted, evidence‑based decision‑making rather than blanket approaches.

Conclusion

Climate transition risk cannot be reduced to a single metric, and effective assessment requires both rigour and nuance. Stand-alone metrics are important for accountability and comparability, but they must be used in combination, and alongside deeper analysis and informed judgement most material. This is particularly true for banks, where aggregate fossil fuel exposure may not fully capture how risks are structured, managed or evolve over time.

We also believe that disciplined engagement on these issues can support meaningful real-world outcomes and long-term value. By combining quantitative data with qualitative analysis and sustained dialogue where it matters most, investors can better understand risk, influence behaviour and support an orderly and economically sustainable transition.

 

Case study shown for illustrative purposes only. The above information does not constitute a recommendation to buy or sell any security.

[1] https://www.ngfs.net/en/about-us/origin-and-purpose

[2] For more detail see our whitepaper on our latest climate scenarios

[3] Large companies we have identified as having the potential to galvanise action in their sectors.

[4] Syndicated debt markets can be resilient to uncoordinated bank exits unless supported by regulation. Rickman et al. (2024) The challenge of phasing-out fossil fuel finance in the banking sector

[5] Private credit O&G deals increased 20x in recent years, as non-bank lenders step into the gap left by the changing risk appetites of traditional lenders. Friends of the Earth (Apr 2026) Financing a Fossil-Free Future

[6] https://www.iea.org/reports/world-energy-outlook-2025/executive-summary

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.