Finance

Ensure that the financial system accounts for climate- and nature-related risks

Climate-related financial risks encompass more than the physical impacts of climate change like wildfires and drought. They also include the impacts of the transition toward a low-carbon economy, such as the rapid adoption of climate policies or technologies that affect economic activity.

Nature-related risks are associated with economic activities that jeopardize the integrity of natural systems on which those activities rely, such as biodiversity loss and ecosystem degradation. Climate- and nature-related risks are interconnected and must be factored into the decision-making of both financial and non-financial corporations.

Measurements of climate- and nature-related risks help corporations target investments and interventions that advance sustainable business transformation by reducing greenhouse gas (GHG) emissions and enhancing climate resilience. Accurate, timely, complete and comparable disclosures from non-financial corporations (those that operate in the real economy) are needed for other market stakeholders — like financial institutions and regulators — to deploy capital efficiently and monitor and manage risks at a portfolio or systemic level.

The Taskforce on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD) have developed frameworks to help corporations and other organizations measure and disclose the financial impact of these risks in a consistent, actionable manner. These frameworks can be integrated into various reporting standards and are useful for any corporation seeking to manage climate- and nature-related risks in their operations.

The growing awareness of climate- and nature-related risks in the private sector is already driving businesses to adopt net-zero transition plans. These plans aim to mitigate biodiversity harm and ecosystem degradation in order to reduce businesses’ exposure and contribution to such risks. So far, most climate- and nature-related risk disclosure has occurred on a voluntary basis, but regulators in most of the world’s largest capital markets are considering mandating such disclosures and incorporating them into the supervision of the financial sector.

Mandatory disclosure requirements will be necessary to standardize and measure risks across the entire economy. Likewise, financial risks must be integrated into the supervision of financial institutions and the financial system as a whole. Regulators also need to ensure that climate risk integration does not lead to inequitable outcomes, such as reducing access to financing for communities that are most vulnerable to climate impacts.

Integration of climate- and nature-related risk measurement and disclosure will help individual firms and markets respond to and manage these risks. It will also allow investors to value companies accurately.

Risk integration by itself will not set the global economy on a path to net-zero GHG emissions. Companies and financial institutions must not only manage risk but also ensure that their investments are aligned with Paris Agreement goals. However, risk management will accelerate the movement of capital (and change the cost of capital) in response to other systems shifts, such as climate policy and technological changes. It will complement other necessary shifts in the financial system and other sectors.

Data Insights

What targets are most important to reach in the future?

Systems Change Lab identifies 3 targets toward which to track progress. Click a chart to explore the data.

What factors may prevent or enable change?

Systems Change Lab identifies 6 factors that may impede or help spur progress toward targets. Click a chart to explore the data.

Progress toward targets

Systems Change Lab tracks progress toward 3 targets. target. Explore the data and learn about key actions supporting systems change.

Share of the world's largest corporations effectively measuring and disclosing climate risks and management, as measured by adoption of existing reporting standards aligned with TCFD recommendations

In 2023, about 52% of companies on the Forbes Global 2000 list reported using standards aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures, up from about 47% in 2022.

Investors, creditors, regulators and other market participants use standardized financial disclosures to obtain important information about a corporation's performance and future prospects. However, financial disclosures do not sufficiently integrate climate-related risks and opportunities.

The industry-led Task Force on Climate-Related Financial Disclosures (TCFD) provides the most widely adopted framework for incorporating climate-related risks and opportunities into financial and non-financial corporate reporting. However, it is only a high-level framework.

Regulators in the United States and Europe are designing robust and detailed mandatory climate reporting regimes that align with the TCFD framework. In the interim, voluntary sustainability standard-setters and reporting platforms like the Sustainability Accounting Standards Board (SASB), CDP and the International Sustainability Standards Board (ISSB) are providing more specific standards aligned with TCFD’s recommendations.

Measuring corporate reporting against available voluntary standards that align with the TCFD framework provides a consistent and comparable way to determine the uptake of the disclosure of climate risks and their management across markets while mandatory regimes are being implemented.

Of the Forbes Global 2000 list, about 52% reported using SASB standards in 2023, up from about 47% in 2022. This puts this indicator on track to reach the 2030 target of 100% coverage as long as reporting continues at the current pace. The number of corporations reporting under ISSB’s International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, or any forthcoming mandatory reporting regimes, will be tracked as data becomes available.

Share of the world's largest global corporations assessing and disclosing standard metrics for biodiversity and nature-related financial risks, as measured by implementation of the TNFD framework

The Taskforce on Nature-related Financial Disclosures has developed a framework for measuring and disclosing nature-related risk, and as of January 2024, only 0.75% of the Forbes Global 2000 list signaled their intent to adopt it.

Deforestation, biodiversity loss, ecosystem degradation and other nature-related risks need to be factored into corporate and financial decision-making.

The Taskforce on Nature-related Financial Disclosures (TNFD) provides a standard framework that financial and non-financial corporations can use to measure and disclose nature-related financial risks. This framework enables financial institutions to assess and manage their nature-related risk exposure and adjust their operational and investment decisions.

The TNFD recommendations were finalized in September 2023 and, as of January 2024, only 0.75% of the Forbes Global 2000 list are part of the inaugural cohort of early adopters who have signaled their intent to adopt them.

Share of global GHG emissions under mandatory corporate climate risk disclosure

In 2022, 35 countries representing about 20% of global emissions have set some form of mandatory climate-disclosure requirements that are aligned with the Taskforce on Climate-Related Financial Disclosures framework.

Mandatory disclosure regimes expand, standardize, and strengthen participation in climate-related risk measurement and management frameworks. In 2022, 35 countries representing about 20 percent of global emissions have set some form of mandatory climate-disclosure requirements that are aligned with the Taskforce on Climate-Related Financial Disclosures (TCFD) framework — a significant improvement compared to the previous year (about 3 percent in 2021). 

A major reason for the increase in coverage was the approval of the EU’s Corporate Sustainability Reporting Directive (CSRD) that will require reporting on a wide range of sustainability disclosures, including climate-related risks, pollution, and circular economy. It will also expand the scope of reporting to about 50,000 entities, including more than 10,000 non-EU firms, thereby effectively extending its requirements beyond EU borders to other countries. 

Despite building upon the TCFD framework, the CSRD goes beyond it by incorporating the “double materiality” concept where corporations have to disclose not only how the environment impacts them financially (i.e., financial materiality) but also the material impacts of their businesses on the climate and society, including in non-financial aspects. This approach aims to make corporate disclosures serve a wider goal of corporate responsibility to society at-large beyond the narrow financial perspective. 

A major development in 2023 in climate risk disclosure was the launch of the International Sustainability Standards Board (ISSB) inaugural standards on sustainability and climate disclosures. It builds upon the TCFD recommendations, requiring Scope 3 GHG emissions disclosure, which represents an important improvement. The ISSB is expected to set the global baseline for corporate climate disclosures as major countries and international bodies such as the International Organization of Securities Commissions have endorsed it. It will also take over the monitoring responsibilities from the TCFD starting in 2024, which will be disbanded. The ISSB climate standard is broadly aligned with the United States proposed rule of mandatory climate risk disclosures which is expected to be finalized despite significant political opposition.

Despite the recent positive developments, efforts remain off track and progress will need to occur about 1.5 times faster to reach the three-quarters target for 2030. There is also a need to ensure these disclosure policies include land-based emissions. If a few large-emitting countries follow the example of others in adopting mandatory disclosures, coverage of global emissions would experience rapid, nonlinear progress and rise dramatically. For example, China and the United States represent about 40 percent of global emissions combined, and United States capital market regulations would affect corporations well beyond US borders. Both countries are contemplating mandatory disclosure rules, which would get coverage on track to the target. Additionally, if major country members of the International Organization of Securities Commissions follow the organization’s endorsement of ISSB and call for its adoption, then coverage would grow significantly and accelerate adoption across the rest of the world.

Enablers and barriers

We also monitor change by tracking a critical set of 6 factors factor that can impede or help spur progress toward targets. Explore the data and learn about key actions supporting systems change.

Number of countries covered by a sustainable or green taxonomy

As of April 2022, 36 countries have developed green taxonomies, and an additional 12 countries have taxonomies under development.

A sustainable or green taxonomy is a classification system that provides a common language and clear definition for what constitutes sustainable economic activities and assets. Taxonomies provide businesses and investors with appropriate definitions for economic activities that are considered environmentally sustainable, and help prevent greenwashing — misleading claims about environmental performance. 

As increasing amounts of capital are mobilized around sustainable themes, it’s critical that commensurate frameworks are developed to ensure that they deliver their intended impact. By applying a regulatory framework that establishes structure and clarity on what is considered environmentally friendly, a sustainable taxonomy provides countries with assurance that financing and investments in the low-carbon economy are being channeled to truly sustainable activities. As of April 2022, 36 countries have developed green taxonomies, including China, South Korea and countries of the European Union. An additional 12 countries have taxonomies under development.

Number of corporations, governments and civil society organizations supporting TNFD

Deforestation, biodiversity loss, ecosystem degradation and other nature-related risks need to be factored into corporate and financial decision-making.

Deforestation, biodiversity loss, ecosystem degradation and other nature-related risks need to be factored into corporate and financial decision-making. The Taskforce on Nature-related Financial Disclosures (TNFD) will provide a standard framework that corporations can use to measure and disclose nature-related financial risks. Adherence to this framework will provide firms with data to assess and manage their nature-related risk exposure and adjust their operational and investment decisions.

Since the TNFD framework is still under development, it is not yet possible to measure adoption and impact. As of December 2023, 1,354 organizations supported the project.

Number of corporations and other organizations reporting on their biodiversity impacts using Global Reporting Initiative's Biodiversity standard

As of 2021, there were at least 2,000 organizations reporting annually under the Global Reporting Initiative’s 304 Biodiversity Standard.

The Global Reporting Initiative (GRI) sets worldwide benchmarks for sustainability and impact reporting. Its mission is to establish comparable standards and support transparent reporting to ensure that firms are on the right track toward a sustainable future. 

As part of this initiative, the GRI Biodiversity Standard is a framework that establishes best practices for corporations to report and manage biodiversity impacts. By reporting on this standard, firms encourage transparency and spur other companies to consider their impacts. 

Corporations that report on the GRI Biodiversity Standard, which is slated to be updated in 2023, are helping establish the disclosure and management of biodiversity impacts as a common business practice. As of 2021, there were at least 2,000 financial and non-financial corporations and other organizations reporting under the GRI 304 Biodiversity Standard annually.

Percent of NGFS members that have implemented or are in the process of implementing climate-related risk assessments

According to the Network for Greening the Financial System, made up of 114 central banks and financial supervisors and 18 observers, 64% of its members have implemented or are pursuing the implementation of climate-related risk assessments as of 2021.

The Network for Greening the Financial System (NGFS) is a consortium dedicated to enhancing the role of the financial system to manage risks and mobilize capital for green and low-carbon investments. Made up of 114 central banks and financial supervisors and 18 observers, the NGFS provides best practices for climate and environmental risk management.

NGFS members factor climate- and nature-related risks into their supervision of risks facing individual financial institutions and the financial system as a whole. Members also consider their role in integrating climate into central bank monetary operations and promoting green finance.

There is broad consensus among financial regulators that climate-related risk assessment is necessary to ensure that central banks monitor risks and safeguard economies and financial markets against disruption. According to the NGFS, as of 2021, 64% of its members have implemented or are pursuing the implementation of climate-related risk assessments in some form. This provides a good initial indication of progress and more granular indicators will be tracked in the future.

Percent of NGFS members that have implemented or are in the process of implementing environmental risk assessments

Of the 114 central banks and financial supervisors and 18 observers that make up the Network for Greening the Financial System, 23% have begun examining the role of environmental risks as of 2021.

The Network for Greening the Financial System (NGFS) is a consortium dedicated to enhancing the role of the financial system to manage risks and mobilize capital for green and low-carbon investments. Made up of 114 central banks and financial supervisors and 18 observers, the NGFS provides best practices for climate and environmental risk management. 

Environment-related risks associated with biodiversity loss could destabilize the natural system that modern society depends on, damage the economy and threaten financial stability. Environmental risk assessments help ensure that central banks monitor risks and safeguard economies and financial markets against disruption. According to the NGFS, as of 2021, 23% of its members have begun examining the role of environmental risks in their economies and financial sectors. This provides a good initial indication of progress and more granular indicators will be tracked in the future.

Number of corporations that are publicly disclosing complete GHG emissions (scope 1, scope 2 and scope 3)

Out of more than 13,000 financial and non-financial corporations that have provided climate information to CDP’s disclosure platform, 3,317 corporations publicly list scope 3 emissions in some form, with no comprehensive data on scopes 1 or 2.

Corporate GHG emissions are divided into three main categories: direct emissions from physical assets owned or controlled by the organization (scope 1); indirect emissions from purchasing electricity, steam, heat or cooling (scope 2); and all other categories of emissions in the value chain of the organization (scope 3). Once emissions are measured, transparent disclosure is important to ensure corporate progress and accountability. Disclosure also supports planning and decision-making processes for many market stakeholders, from financial institutions to regulatory agencies.

Financial institutions, for example, can better measure their own scope 3 emissions resulting from financing and investment activities when they are able to obtain such disclosures from the corporations with which they do business: for the financial services sector, these “financed emissions” make up nearly 100% of institutions’ GHG footprints.

Methodologies for measuring financed emissions, like those developed by the Partnership for Carbon Accounting Financials (PCAF) in conjunction with the GHG Protocol, are also available to help financial institutions come up with consistent and accurate financed emissions measurements.

Out of more than 13,000 (financial and non-financial) corporations that have provided climate information to CDP’s disclosure platform, 3,317 corporations publicly list scope 3 emissions in some form. On average, they reported on five to six categories out of the 15 listed under scope 3.

Data on disclosures of scopes 1 and 2 emissions will be added once it is made available. (It is possible to assume that most companies that disclose scope 3 emissions are likely disclosing scopes 1 and 2; scope 3 is generally disclosed after scopes 1 and 2 because it is harder to measure.)

Corporations measuring their full GHG footprint, starting with their most significant sources of emissions, will have better data to assess and manage risk associated with those emissions. Disclosing that information will enable financial institutions and governments to do so as well.

Photo credits

Photo by Markus Winkler

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