Finance

Measure, disclose and manage climate- and nature-related financial 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 2 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 2 targets. target. Explore the data and learn about key actions supporting systems change.

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

As of September 2022, 1,755 corporations reported using standards aligned with the recommendations of the Taskforce on Climate-Related Financial Disclosures, showing growth from 1,378 in 2021.

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 Taskforce 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 the 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. 

In 2021, 1,378 corporations reported using SASB standards. That number grew to 1,755 corporations by September 2022. Of the Forbes Global 2000 list, about 36% reported using SASB standards in 2022, up from about 32% in 2021. 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 to CDP and 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 (financial and non-financial) 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 is developing a framework for measuring and disclosing nature-related risk, and as of September 2022, 653 organizations supported the initiative.

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. This framework will enable financial institutions to assess and manage their nature-related risk exposure and adjust their operational and investment decisions. 

Although the TNFD framework is not yet finalized (having shared a “beta” draft for consultation), as of September 2022, 653 organizations (including corporations and civil society organizations) supported the TNFD initiative. That level of support demonstrates the demand for this type of framework. Once the TNFD is finalized, this indicator will track the share of corporations in the Forbes Global 2000 list that have implemented it.

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 corporations (financial and non-financial) that are publicly disclosing complete GHG emissions (scope 1, scope 2 and scope 3)

Leadership
Out of more than 13,000 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. This category of emissions, often referred to as “financed emissions,” is particularly important for financial institutions to measure and disclose because such emissions constitute most of these institutions’ GHG footprints. For the financial services sector, this category of scope 3 emissions makes up nearly 100% of institutions’ emissions.

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 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.

Number of countries that have planned or set TCFD-aligned regulatory rules and mandate corporate climate/sustainability disclosures and reporting

Strong Institutions
As of October 2022, 36 countries are expected to set some form of mandatory climate-disclosure requirements that are aligned with the Taskforce on Climate-Related Financial Disclosures framework.

Mandatory disclosure regimes expand and strengthen participation in climate-related risk measurement and management frameworks. As of October 2022, 36 countries are expected to set some form of mandatory climate-disclosure requirements that are aligned with the TCFD framework — up from 3 countries in 2020. In some places, such as the European Union, authorities have proposed TCFD-aligned regulations that include reporting on other sustainability elements beyond climate, including biodiversity and social issues like human rights.

Number of corporations, governments and civil society organizations supporting TNFD

Leadership
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 September 2022, 653 organizations supported the project.

Number of corporations (non-financial and financial) and other organizations reporting on their biodiversity impacts using Global Reporting Initiative's Biodiversity standard

Leadership
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 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

Leadership
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

Leadership
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.

Photo credits

Photo by Markus Winkler

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