Climate Regulations and Frameworks: What's Changing and What Financial Institutions Need to Know

The 2008 financial crash, which drove trillions in losses and deep economic damage, showed why effective prudential regulation and supervision matter. Climate-related risks are projected to be far larger. The NGFS estimates global GDP losses of up to 15% by 2050 under current warming trajectories, and financial regulators are acting to protect the markets.

The shift from voluntary frameworks to mandatory regulations has been gradual, and the reporting requirements have not been welcomed by every institution. For many, the pressure is being felt acutely. Sustainability and risk teams are being asked to deliver against a growing list of frameworks and deadlines, often without the data, models, or internal capacity to keep up.

However, they are designed to strengthen a financial system that is now exposed to a new category of risk, and with the right tools and capabilities, the process of reporting can reveal opportunities to manage this risk and generate returns. Understanding the regulatory landscape is the first step.

Climate regulations set requirements for what financial institutions must legally disclose, assess, govern, or manage in relation to climate-related risk: the physical impacts from a warmer world such as flooding or wildfires, or the ‘transition risk’ as policy and economies change and adapt.

There are dozens of taxonomies in use or under development worldwide, and each varies in its requirements. However, they do often converge around core themes: board oversight, internal controls, disclosure, and risk management.

Examples of climate regulations include:

Disclosure has evolved beyond a reporting exercise into something more strategic; it now sits at the intersection of climate risk and operational decision-making, testing both the exposure in firms' portfolios and their capacity to manage it.

Across jurisdictions, the expectations are increasingly converging for how firms should manage and report that exposure:

• Governance oversight at board and senior management level
• Integration into risk management
• Forward-looking scenario analysis
• Quantification of financial impacts (where material)
• Standardised metrics and targets

Although specific regulations may still vary, mature reporting frameworks such as the ISSB’s IFRS S1 and S2 standards are built around this broad structure to ease compliance across jurisdictions. These are being adopted as a baseline in a growing number of them.

There is a growing acknowledgement of the serious risk to the financial sector from accelerating climate change, as the data linking physical risk to financial loss becomes harder to ignore. The result is that regulation is now being introduced across global markets, strengthening resilience to climate shocks and, in many cases, supporting transition planning and emissions transparency. Common disclosure standards also reduce fragmentation, making it easier for regulators to introduce requirements and for firms to implement them consistently.

In some jurisdictions, disclosure is already mandatory. The EU's CSRD requires in-scope companies to report sustainability information under ESRS, including climate-related impacts, risks and opportunities and emissions. California’s SB 253 requires companies above a revenue threshold that do business in the state to disclose Scope 1 and 2 emissions, with Scope 3 phased in.

A climate framework is the methodology that underpins how climate risks are assessed, classified, and reported. Depending on the jurisdiction, they may be voluntary or mandatory.

Examples of climate reporting frameworks include:

Climate regulations and frameworks are increasingly interdependent. Regulations provide the legal obligation to disclose, but they often rely on frameworks to define what must be reported and how.

The EU's CSRD, for example, mandates sustainability disclosure but requires companies to report against EU Taxonomy criteria — including the share of revenue, CapEX and OpEX that qualifies as environmentally sustainable. The regulation provides the legal obligation; the framework provides the measurable substance.

Frameworks themselves play different roles. Climate frameworks such as TCFD and ISSB IFRS S2 provide the methodology that underpins many regulations. Others, like the EU Taxonomy or BREEAM, define what qualifies as sustainable or resilient in specific contexts.

Climate regulation used to focus on disclosure. It now expects firms to act on the financial consequences of physical and transition risks, not just report them.

Knowing an asset is "high risk" is no longer enough, and investment committees, credit teams, and CFOs want a number. What is the expected annual loss, what does it do to NOI, what's the impact on cost of capital? This is where regulation is heading: away from qualitative ratings and towards quantified financial impact.

Behind those numbers sit two distinct categories of climate risk, and regulation now expects firms to identify, manage, and disclose both. Physical risks include damage from extreme weather, the practical impacts of long-term climate shifts, and asset degradation. Transition risks include technological change, shifting consumer demand, policy changes, and carbon pricing. Neither category is theoretical, and they are already affecting capital pricing, allocation, and asset values.

The consequences are visible: The European Central Bank now requires banks to assess transition risks in their portfolios, including exposures to carbon-intensive sectors sensitive to EU climate policy (e.g., carbon pricing and border adjustment mechanisms such as CBAM). Physical risk is moving in the same direction. Insurers are withdrawing coverage from high-risk areas, with State Farm halting new home insurance policies in California in 2023 over wildfire exposure.

But despite this, most climate disclosures still focus disproportionately on emissions and transition risk. Across conversations with senior climate risk teams at large financial institutions, physical risk quantification is consistently flagged as the area where current data and methodologies fall short of what regulators are starting to expect. Carbon-heavy, physical-risk-light reporting is increasingly out of step with the bar TCFD-, CSRD-, and PRA-aligned supervisors are now setting.

Producing a credible financial number for an exposure 10 or 30 years out requires a forward-looking method.

Established tools, like natural catastrophe models, largely extrapolate from historical events and observed loss patterns. Forward-looking approaches like scenario analysis, transition pathways, and stress testing complement that view by asking how risk evolves under different warming and transition trajectories over defined time horizons.

This forces firms to confront what these futures could mean for their portfolios, business models, and financial outcomes. This methodology was central to TCFD and has been incorporated into many climate disclosure frameworks and regulations.

Climate regulation now carries real consequences, including fines, restricted capital access, and board accountability. But it also creates real opportunity for institutions that move past compliance and build resilience into how they operate.

Accountability is also moving up the chain. Regulators increasingly place responsibility for climate compliance at board level, with members facing personal reputational risk for failing to meet requirements. Non-compliance carries significant penalties, with fines and other penalties handed out at an increasing rate as new regulations come into force. For example, in 2022 Deutsche Bank’s DWS faced a $25m fine to settle SEC probes, resulting in the CEO being removed and a major reorganisation of senior management and governance.

The cost extends beyond fines. Asset owners are increasingly pricing climate risk into their allocation decisions. Misalignment with their objectives can mean reduced access to capital, higher cost of capital, or divestment.

Climate regulations are designed to strengthen financial institutions, but the opportunity extends beyond compliance. Understanding how climate change will reshape the global economy, and the financial sector within it, equips institutions to identify and capitalise on new avenues for growth.

Managing risk and capturing opportunity are two sides of the same exercise. Done well, they generate value across short and long-term horizons, forming the foundation of genuine, lasting institutional resilience.

Conforming to climate regulations and frameworks is often perceived as a box-ticking exercise, but to frame it so misses both the severity of climate-related risks facing the financial services sector, and the opportunities that getting ahead of the curve can create.

The institutions that recognise this are already moving. They're translating risk scores into financial numbers, embedding climate into investment decisions, and turning adaptation into measurable ROI. As Blackrock’s Larry Fink said, “decarbonizing the global economy is going to create the greatest investment opportunity of our lifetime.” The same is true of resilience.

Climate X helps financial institutions price physical risk, plan for adaptation, and turn both into competitive advantage.