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UK Banks Under Fire for Relying on Questionable Net-Zero Study in Lending Decisions

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  //business-finance.news-articles.net/content/202 .. ionable-net-zero-study-in-lending-decisions.html
  Published in Business and Finance on Monday, December 15th 2025 at 5:16 GMT by IBTimes UK

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Banks Scrutinised for Relying on a Question‑able Net‑Zero Study in Their Lending Practices

In a story that has already sent shockwaves through the UK banking sector, several of Britain’s largest lenders are under fire for basing parts of their climate‑risk assessment and loan‑approval processes on a net‑zero study that environmental groups and climate‑risk analysts say over‑estimates progress toward a carbon‑neutral future. The critique was published by the International Business Times on June 24, 2023, and it stitches together evidence from the study itself, statements from industry insiders, and the reactions of environmental NGOs, regulators and, in some cases, the banks in question.

The Study at the Heart of the Controversy

The report in question was produced by the Climate Action Network (CAN) in collaboration with the UK’s Climate Change Committee (CCC) and was titled “Net Zero by 2050: A Pathway for the UK Financial System.” The document proposes a set of “target‑aligned” pathways that aim to reduce greenhouse‑gas emissions to net zero by the middle of the century, aligning with the UK’s 2050 climate target.

While the report’s headline claims to be “data‑driven,” critics argue that its methodology is built on a handful of assumptions that are “optimistic, if not unrealistic.” Chief among the concerns is the use of a fixed carbon‑price signal of £20 / tCO₂ throughout the decade, coupled with the assumption that the fossil‑fuel sector can transition to low‑carbon alternatives within a compressed timeline. The study also relies heavily on the “business‑as‑usual” scenario projected by the UK’s National Energy Modeling Framework (NEMF), which many say does not adequately account for the volatility and policy shifts seen in the energy market over the past decade.

Because the report presents a fairly clean “green” pathway for major industries, it has become an easy reference point for banks looking to integrate climate risk into their credit risk models. The paper is often cited in risk‑assessment documents, and, according to leaked internal communications, was used by the Credit Risk Analysis teams at HSBC, Lloyds, Barclays and RBS to flag “high‑risk” corporate borrowers in the fossil‑fuel space.

How the Study Influenced Lending Decisions

The banks’ internal risk‑assessment frameworks incorporate a variety of climate‑scenario models, each designed to estimate the financial impact of the transition to a net‑zero economy. In most cases, the framework used by banks contains a “worst‑case” scenario in which a high‑carbon economy continues unchecked, and a “best‑case” scenario that mirrors the trajectory laid out in the CAN/CCC report.

In practice, the “best‑case” scenario has been used to set upper limits on loan amounts that banks are willing to offer to fossil‑fuel firms, under the pretense that a smooth transition will keep credit risks at manageable levels. If the report over‑estimates how quickly the industry can decarbonise, then the banks may be under‑estimating the true risk of lending to these firms. The IBTimes article points to a specific example in which Lloyds Bank approved a multi‑million‑pound loan to a coal‑power developer based on the optimistic scenario. Once the project was shelved and the developer went into liquidation, Lloyds faced significant write‑offs that could have been avoided had the bank relied on a more conservative scenario.

According to a whistleblower quoted in the article, the bank’s credit‑risk model was set up so that loans would “break even” only if the firm’s emissions trajectory matched the CAN/CCC projection. If the company failed to meet its carbon‑reduction targets, the model would not trigger a risk alert. This practice effectively insulated banks from the full financial impact of an “unfulfilled net‑zero” commitment.

The Environmental Group Response

The Carbon Tracker Initiative, a prominent climate‑risk research organisation, has publicly called the banks’ reliance on the study “dangerously naïve.” In a statement to the IBTimes, the organisation warned that “the study’s assumptions are not only unrealistic but also harmful because they lull banks into a false sense of security about the financial risks of climate change.”

Another environmental group, Friends of the Earth UK, launched a petition asking the FCA to investigate whether banks are “violating their duty of care” by basing credit decisions on a flawed model. The petition has already gathered over 20,000 signatures, signalling widespread concern among both the public and the sustainability‑focused investment community.

Regulatory Fallout

The Financial Conduct Authority (FCA) has taken the criticism seriously. In a statement, the regulator said it is “monitoring the situation closely” and that banks are required to disclose their climate‑risk methodologies under the forthcoming Basel III requirements. The FCA is also exploring the possibility of tightening the disclosure requirements for banks, in order to prevent the use of “unvalidated models” that could expose the financial system to unforeseen climate‑related shocks.

In the meantime, the FCA has commissioned an independent review of the methodology used by the CAN/CCC study. The review will assess whether the study meets the “sufficiently robust” standards that the regulator expects from industry models that inform lending decisions. The outcome of the review is expected to come by the end of the year.

The Banks’ Defense

Despite the criticism, the banks themselves have defended their approach. In a joint press release, representatives from HSBC, Lloyds, Barclays, and RBS acknowledged that the study was “one of several tools” used in their risk assessment. They emphasised that their risk‑analysis processes incorporate a range of scenarios, including a “high‑risk, high‑carbon” pathway that would trigger a review of exposure to fossil‑fuel companies.

“Banking decisions are based on a composite view of risk, and the CAN/CCC report is an integral, but not sole, component of that view,” said a spokesperson for HSBC. “We remain committed to transparency and to continuously updating our models in light of new data.”

The banks also pointed to their participation in the Net Zero Banking Alliance, noting that they have pledged to align their lending portfolios with a net‑zero trajectory. According to the alliance’s own metrics, the banks have cut their fossil‑fuel exposure by 18 % in the last three years, a figure that critics say still falls short of the aggressive reductions needed to avoid a 1.5 °C world.

Bottom Line

The International Business Times article paints a picture of a financial system that may be too optimistic about the pace of decarbonisation, largely because of its reliance on a single net‑zero study that has been widely criticised for its assumptions. The criticism has prompted regulatory scrutiny, spurred environmental groups to mobilise, and forced banks to revisit the robustness of their climate‑risk models.

While the banks claim that the study is just one tool in a broader suite of risk‑assessment mechanisms, the episode underscores a broader issue: how the financial sector integrates climate science into practical decision‑making. In a world where climate risk is increasingly material, the use of questionable assumptions could translate into real financial losses—especially for borrowers whose emissions‑reduction timelines are more conservative than the study suggests.

Whether the banks will revise their lending frameworks in light of this controversy remains to be seen. What is clear is that regulators, investors, and the public are paying close attention to the intersection of climate science and financial prudence. The outcome of this scrutiny could set new precedents for how banks use climate data, shaping the future of sustainable finance in the United Kingdom and beyond.