Net zero or net loss for financial services? – Plus 2 companies leading the way

With companies lowering or withdrawing their commitment to a net zero world, here’s why financial institutions are uniquely placed to deal with climate change.
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Banks and insurers sit at the heart of the global economy – and at the centre of the climate transition.

They’re not only exposed to the risks of a warming world, but also uniquely placed to finance the solutions to it.

For investors, the stakes are rising fast.

But which two heavy hitters in this sector are leading the way in the energy transition?

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

A growing bill for climate damage

Climate change is no longer a distant threat, it’s already hitting balance sheets.

In the first half of 2025, global insured losses from natural disasters reached $100bn, the second-highest half-year total on record. Looking ahead, losses from disasters in major markets are expected to rise by as much as 120% over the next 20 years.

Encouragingly, the protection gap (the share of losses left uninsured) fell to a record low of 38%, thanks largely to the depth of US insurance markets. For the first time, insurers absorbed most weather-related losses, rather than governments, businesses or households.

But even as coverage expands in some areas, it’s disappearing in others. The physical impacts of climate change are creating "insurance deserts" across the US. In locations with rising numbers of hurricanes, floods, and wildfires, insurers have withdrawn coverage entirely, judging it too unprofitable, or too risky, to underwrite.

The long-term risks are substantial.

By 2050, insurers could see annual losses climb 70% and profits fall 10–15% if climate risks are poorly managed. Banks face their own exposure, with UK lenders at risk of £225bn in credit losses by mid-century.

Financial services are moving from being occasional shock-absorbers to permanent shock-bearers of climate damage.

Fossil fuel financing (in $bn) vs global catastrophe losses (in $bn)

Source: Fossil fuel financing, Banking on Climate Chaos reports – 2022 report for 2016-2020 data and 2025 report for 2021-2024 data. Global catastrophe losses, Swiss RE Institute 2025.

The anomaly was 2017, when hurricanes Harvey, Irma and Maria drove global insurance losses to 111% above trend.

Financing the problem

The risks are mounting just as many banks are retreating from climate pledges.

Despite 2024 being the warmest year on record, the world’s 65 biggest banks channelled $869bn into fossil fuel companies. Two-thirds increased financing year-on-year. Wells Fargo even abandoned its net zero by 2050 target, the first major US bank to do so.

Abandoning these targets risks fuelling a vicious cycle: more emissions, more warming, more losses. Industry experts warn that 3°C of warming could make some asset classes uninsurable, potentially triggering a “climate-induced credit crunch”.

Regulators are already stepping in, from the European Central Bank issuing fines for poor climate risk management to the UK’s Advertising Standards Authority cracking down on misleading “green” claims.

Part of the solution

Financial institutions are not only exposed to climate risk, but also central to tackling it.

Insurers can reward resilience with better rates, while banks decide whether capital flows to renewables or to fossil fuels.

Delaying is costly – every year of inaction adds over $1tn in global adaptation and mitigation costs. For investors, the focus is on backing firms with credible plans.

Aviva

Aviva’s CEO recently reaffirmed the group’s net zero 2050 commitment, despite rising political pushback. The insurer is also using its underwriting to support the real-economy transition – from backing renewable projects and EV adoption, to encouraging sustainable building materials in construction, a sector that drives 40% of UK emissions.

Beyond its climate plans, Aviva’s strength lies in its breadth. With insurance, wealth, and retirement all under one roof, the group has multiple growth levers and a solid base of recurring revenue. The Direct Line acquisition has sharpened its competitive edge in UK motor and home insurance, and while buybacks are paused for now, surplus capital has been put to work in a way that could unlock long-term value.

Momentum is building across key divisions. General insurance is benefiting from disciplined pricing and new business wins, while the bulk annuity arm continues to feed scale into Aviva Investors. Add in rising demand for private health cover and a growing protection book, and the investment case looks well-rounded.

That said, a good start to the year means execution will need to stay sharp to justify the premium valuation, and there are no guarantees.

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NatWest

NatWest hit its £100bn climate and sustainable finance target ahead of 2025 and now, it’s doubled down. It now plans to mobilise £200bn over the next five years, and extend funding to carbon reduction initiatives in hard-to-abate sectors such as steel and cement.

More broadly, NatWest is a business with momentum and discipline. Mortgage growth was strong over the first half as buyers moved ahead of stamp duty changes, and while no further rate cuts are expected this year, we think demand can stay buoyant. Importantly, margins are no longer under pressure, which should support interest income and help offset any softness elsewhere.

On the deposit side, the shift toward higher-rate accounts has stabilised, easing the drag on funding costs. Cost control remains a bright spot, with the bank tracking well against its targets. With the government stake now fully exited and the structural hedge rolling onto better rates, NatWest has room to manoeuvre.

Sentiment has rightly improved over the past 18 months, but we still see upside on offer if NatWest can deliver the double-digit earnings growth that’s expected over the next couple of years.

The soft UK economy and potential tax hikes from November’s UK Budget are the two key risks to watch.

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An independent Non-Executive director of Harp BidCo Ltd (parent company of the Hargreaves Lansdown Group) is also an Independent Non-Executive Director at one or more of Aviva’s subsidiary companies.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.

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Written by
Tara Clee
Tara Irwin
Senior ESG Analyst

Tara's part of our ESG Analysis team. She is passionate about climate change and helping clients invest responsibly.

Matt-Britzman
Matt Britzman
Senior Equity Analyst

Matt is a Senior Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors. He is a CFA Charterholder and also holds the Investment Management Certificate.

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Article history
Published: 6th October 2025