BrazilIntegrating Climate, Nature and Social into ESG financial services risk management
As financial institutions step up their ESG ambitions, they are coming under mounting pressure to integrate these factors into their risk management frameworks. But while most attention currently goes to Environmental domain, the coming years will see growing focus on other parts of the ESG equation such as Nature and Social, write Bas Beerkens and Kiki Hajer from ACE + Company.
The integration of environmental and social factors into risk management is mainly driven by regulation, with maturity varying significantly across themes. Integration of climate risks has progressed substantially, supported by extensive regulatory focus and supervision. The ECB Guide on climate-related and environmental risks has been a key driver, compelling banks to integrate climate considerations into their strategies, governance, and risk management.
Mandatory frameworks like the Corporate Sustainability Reporting Directive (CSRD) have further advanced this integration by standardizing and expanding the scope of climate risk reporting obligations. In this context, the EU Taxonomy has also played a significant role in accelerating the introduction of climate-related regulation in Europe. It provides clear criteria for sustainable activities, thereby guiding businesses and financial institutions toward sustainable decision-making.
Moreover, the disclosure framework published by the Taskforce on Climate-related Financial Disclosures (TCFD), while voluntary, has informed regulatory frameworks like the ECB Guide and the CSRD, thereby pushing organizations to enhance transparency regarding climate-related risks. Looking ahead, the integration of climate risks into CRR3/CRD6 will further enhance the incorporation of climate risks into financial institutions’ risk management frameworks.
Similarly, the EBA Guidelines on the management of ESG risks (published in January 2025) and the recently published EBA Draft Guidelines on ESG Scenario Analysis (currently open for consultation until 16 April 2025) are both anticipated to take effect on 11 January 2026, providing additional support for this progression.
To a Broader Nature Focus
While climate risks have seen the most regulatory development, progress is being made toward integrating nature-related risks. Regulatory initiatives, such as the ECB Guide on climate-related and environmental risks and the disclosure framework developed by the Taskforce on Nature-related Financial Disclosures (TNFD), are encouraging financial institutions to incorporate nature-related risks into their strategies.
Although the TNFD framework is currently voluntary, its adoption is gaining traction; over 500 companies and financial institutions have committed to begin nature-related corporate reporting based on its recommendations, as announced by the TNFD at the COP16 Biodiversity Conference. The EBA Guidelines on managing ESG risks are expected to provide additional guidance on integrating these factors into risk management.
Furthermore, the increased awareness of the interconnectedness of climate- and nature-related risks is contributing to a new level of understanding about the topic for both companies and supervisors. This will most likely result in future amendments in the regulatory landscape.
Social Factors are Lagging Behind
Whereas nature-related risks are gaining attention, the focus on social risks remains less advanced. Following the publication of the EU Taxonomy, the European Commission (EC) was mandated to assess the potential of incorporating social objectives. In response, the EC established the Platform on Sustainable Finance, which published a technical report on the Social Taxonomy in February 2022.
This report proposes a structure for a social taxonomy and outlines recommendations for developing a framework to identify socially sustainable activities. However, a formal social taxonomy has not yet been established, as its development was postponed until at least the end of the previous parliamentary term, which concluded on 31 October 2024.
The postponement was primarily due to the complexity of establishing common definitions and metrics for social investments, along with a lack of political consensus. As the new parliamentary term progresses, there are opportunities to revisit discussions around the social taxonomy, but achieving tangible progress will likely take considerable time given the ongoing challenges.
Despite this, other frameworks are gradually pushing financial institutions to consider social risks, such as the CSRD reporting requirements for social factors. Additionally, the recent launch of the Taskforce on Inequality and Social-related Financial Disclosures (TISFD), following the TCFD and TNFD, marks an important first step toward developing guidelines for addressing social risks.
From Climate to Nature and Social
The timeline shows a clear trend: regulatory progress on climate risks has paved the way, with nature and social risks following similar trajectories. The first step in this trajectory is the launch of taskforces such as the TCFD, TNFD, and more recently the TISFD. As a second step, these taskforces introduce voluntary disclosure frameworks, outlining a methodology to not only report, but also think and talk about the topic.
These frameworks either directly inform regulatory guidelines or gain traction through voluntary adoption by institutions, as seen with the TNFD framework. As a third step, these developments ultimately result in concrete requirements through regulatory publications.
This three-step pattern indicates that, while climate risks have seen the most regulatory attention so far, the integration of nature and social risks is expected to follow a similar trajectory and expand into regulatory frameworks in the coming years. However, at this stage, supervisory priorities remain focused on climate risks.
Nonetheless, the observed trend indicates that institutions would benefit from proactively incorporating emerging risks into their frameworks to be ready for the inevitable adoption into regulation. Early adoption already positions organizations ahead of the curve, ensuring efficient compliance and potentially mitigating future audit findings, penalties, and reputational risks.
