In 2025, climate change is reshaping discussions of risk and return in corporate boardrooms. The financial services industry, which is effectively the backbone of the global economy, is taking climate risk extremely seriously.
Whether you’re in banking, insurance, or asset management, the expectations around climate and sustainability performance are high, and rightly so. Investors want to know their capital won’t be compromised by short-sighted or narrow-visioned financial forecasts. Regulators are demanding transparency into the negative externalities that have too long gone unpriced in the global market.
So financial services face two pressures from a changing climate: they must reduce their own negative impact (and communicate it clearly), while also adapting business models and strategies to avoid the physical consequences of climate change. Those that see this double-edged challenge as an opportunity are the smart ones.
Sustainability has become a lever for strategic advantage. Financial institutions that genuinely embed environmental, social, and governance (ESG) considerations into their operations and decision-making, rather than simply paying lip service, are better positioned to manage risk, uncover new opportunities, and build trust in a shifting world.
So how can your organization move beyond the buzzwords and take meaningful action?
Why sustainability matters for financial institutions
ESG stands for environmental, social, and governance. Each pillar captures different areas of risk and opportunity:
- Environmental: Climate change, emissions, energy use, biodiversity, and more
- Social: Workforce issues, supply chain ethics, customer treatment, community impact
- Governance: Board oversight, business ethics, executive pay, data transparency
If they haven’t already, financial institutions need to quickly move past the idea of ESG as a mere reporting obligation and into the realm of how ESG issues influence financial outcomes, and how financial activities shape the broader world.
These are the two major sides of the coin for financial institutions, and they’re unique to this industry. On the one hand, financial services face serious economic risks from ESG issues. On the other hand, their position as the funders of the business world gives them enormous leverage to make a meaningful difference in the world through strategic allocation of capital.
When financial institutions integrate ESG into risk management, they can identify vulnerabilities in portfolios, improve lending and underwriting practices, and align investments with long-term value creation. It also helps with stakeholder trust by demonstrating to regulators, clients, and shareholders that the institution understands and manages today’s most pressing systemic risks.
What’s driving ESG adoption in financial services?
What’s pushing financial institutions to take ESG risk seriously? A mix of drivers:
- Regulatory pressure: Disclosure requirements are rapidly expanding. Frameworks like the Corporate Sustainability Reporting Directive (CSRD), International Financial Reporting Standards (IFRS, developed by the ISSB), and the Sustainable Finance Disclosures Regulation (SFDR) are demanding more non-financial transparency
- Investor demand: Shareholders are calling for better ESG data and more credible strategies
- Client expectations: Individuals and institutions want products and partners that align with their values
- Climate risk: Physical, transition, and liability risks are all playing a bigger role in financial outcomes
Rising climate risk is already affecting the financial sector. In 2023, climate-related disasters caused more than $250 billion in global economic losses, according to Munich Re. These events hit financial institutions directly and indirectly, through increased insurance claims, higher credit defaults, and the devaluation of physical assets used as loan collateral.
Regulators are taking note. Canada’s federal banking regulator, OSFI, recently conducted its first climate scenario stress tests, requiring federally regulated financial institutions, including major banks and insurers, to quantify their climate risk and perform scenario modelling to assess impacts on credit quality, insurance claims, and asset valuations.
These exercises signal a shift: regulators expect firms to quantify and manage their exposure to climate risk using real data and credible assumptions.
The business case for sustainability in financial services
ESG brings two kinds of rewards: bottom-line rewards through better management, and top-line rewards thanks to the new opportunities it opens up.
Bottom-line rewards
Financial services companies that integrate ESG will reap significant rewards. Better ESG management strengthens organizational resilience by exposing hidden risks, such as stranded assets or vulnerable supply chains, before they impact the bottom line.
Top-line rewards
At the same time, sustainable practices help firms unlock new markets, design innovative financial products, and attract capital from responsible investors who are increasingly scrutinizing ESG performance.
As disclosure expectations rise and climate risk becomes more financially material, firms that proactively manage these issues gain a competitive edge. Sustainability also builds trust with regulators, clients, and shareholders, reinforcing a firm’s license to operate. Ultimately, ESG integration supports long-term value creation, both in the traditional sense for shareholders and also for stakeholders with non-financial outcomes in mind.
Challenges to sustainable finance
Despite growing momentum, sustainable finance faces some real challenges, and financial institutions are still lagging on climate risk management. For example, take financed emissions, the greenhouse gas emissions associated with a firm’s lending, investment, and underwriting activities. Even in 2025, measuring these emissions is very difficult, especially when data is incomplete or inconsistently reported across borrowers and portfolio companies. Then there’s the question of determining how best to integrate climate-related risks into underwriting, lending, and investment decisions. This can be more of an art than a science, requiring deep expertise and the kind of judgment that comes from years of practice—something hard to find in such a nascent discipline relying on tools and systems not designed for this new kind of assessment.
Balancing profit motives with ethical responsibilities adds further tension. Firms are expected to deliver short-term returns while also aligning with long-term sustainability goals and complying with evolving regulatory requirements. Beyond environmental considerations, governance and social dimensions present their own difficulties. Ensuring fair lending practices, improving board oversight of ESG issues, and advancing diversity and inclusion throughout the organization are essential but often underdeveloped areas. Together, these challenges require not just new tools and frameworks, but also a cultural shift in how financial institutions define risk, value, and accountability.
How financial services are financing the transition
Financial institutions have a powerful role to play in accelerating the global shift to a low-carbon economy. Through products like green bonds, sustainability-linked loans, and climate-aligned investment vehicles, they’re helping direct capital toward activities that support decarbonization and resilience. Green bonds are being used to fund renewable energy infrastructure, clean transportation, and sustainable real estate. Meanwhile, sustainability-linked loans tie borrowing terms to environmental or social performance targets, incentivizing progress across industries.
Banks and asset managers are increasingly developing new products with climate goals built in. For example, some institutions now offer mortgages for energy-efficient homes or investment portfolios screened for climate risk exposure. Others are applying climate stress testing to better understand how transition and physical risks could impact credit quality or asset valuations under different scenarios.
Innovations like climate risk-adjusted portfolios are becoming more mainstream, helping investors balance returns with long-term climate considerations. These tools allow financial institutions to reprice risk, support green innovation, and shift capital away from high-emitting sectors, all while responding to rising client demand for sustainable financial products.
Best practices for sustainability reporting and disclosure
Clear, credible ESG disclosures are now essential for maintaining trust and meeting regulatory expectations. But many financial institutions still struggle with where to start and how to do it well. The first step is aligning with globally recognized frameworks. The International Sustainability Standards Board (ISSB) sets widely accepted guidelines for voluntary climate-related reporting. For firms operating in the European Union, the EU Taxonomy and Corporate Sustainability Reporting Directive (CSRD) are critical for compliance.
Collecting reliable, decision-useful data is one of the biggest challenges. Institutions need to set up systems that capture the right information across business units, ensure consistent definitions, and track performance over time. Avoiding greenwashing is also key. That means being transparent about limitations, backing claims with data, and avoiding vague or overly broad language.
Tools like Manifest Climate help organizations move from manual, fragmented disclosure analysis to a more automated and confident approach. Manifest Climate makes sophisticated use of AI to help finance teams with sustainability. (Read about the three ways AI powers smarter decisions in sustainable investing.)
Manifest Climate’s platform maps disclosure frameworks to internal documents, identifies gaps, and provides benchmarking insights, so firms can quickly get up to speed with what they’re doing well and what’s missing.
| Case study: How KingSett Capital streamlined ESG efforts and boosted investor confidence KingSett Capital, a Canadian real estate investment firm with over $17 billion in assets under management, was under increasing pressure to meet investor expectations on climate and ESG. Like many in the sector, the team faced a common challenge: how to keep up with evolving disclosure standards without stretching already limited resources. Before working with Manifest Climate, KingSett relied on internal manual reviews to track their alignment with TCFD. The process was time-consuming and made it difficult to benchmark against peers or respond quickly to regulatory shifts. By adopting Manifest Climate’s platform, KingSett was able to: – Benchmark its disclosures against peers and frameworks – Identify and prioritize disclosure gaps – Track year-over-year improvement – Free up internal capacity for more strategic work With centralized insights and automated analysis, the firm strengthened its investor reporting and improved alignment with global best practices. The end result was greater confidence from stakeholders, and more time to focus on strategy instead of scrambling to catch up. Read the full case study |
| Case study: How a mid-sized insurer improved resilience by assessing climate risk exposure A regional insurance provider knew that climate change posed a material risk to its business, but lacked the tools to properly assess that risk across its underwriting and investment portfolios. With wildfires, floods, and extreme storms growing more frequent, the company needed a clearer picture of how physical climate risks could affect its bottom line. It also wanted to understand how transition risks, like carbon pricing and regulation, might impact the assets it insured or invested in. Using Manifest Climate, the insurer was able to: – Assess climate-related risks across both sides of the balance sheet – Identify areas of high exposure within its property portfolio – Understand which parts of its investment strategy might be vulnerable to regulatory change – Begin aligning with TCFD and ISSB disclosure frameworks The platform helped the company build internal climate competence and make informed adjustments to its pricing, capital planning, and investment decisions. What started as a compliance effort became a broader risk and resilience strategy. Leadership gained a better understanding of long-term exposure and felt more confident explaining their approach to boards, regulators, and customers. Read the case study |
The future of sustainable finance
The next few years will reshape what sustainable finance looks like. New regulations are raising the bar for transparency and consistency. At the same time, financial supervisors are embedding climate risk into stress testing, capital adequacy frameworks, and systemic risk oversight. These changes mean sustainability will increasingly intersect with financial performance, not just reputational value.
Stakeholder expectations are also evolving. Clients, shareholders, and civil society groups are demanding real progress. Financial institutions that fail to demonstrate their contributions to climate goals face increasing scrutiny and long-term competitive risks.
But there’s opportunity too. Demand is growing for sustainable financial products, from transition financing to ESG-integrated investment strategies. Institutions that embed sustainability into core strategy, rather than treating it as a compliance obligation, will be better equipped to innovate, respond to shifting risks, and build trust. The leaders of tomorrow are already treating ESG as a business driver, and the rewards are already playing out.
How Manifest Climate helps financial institutions lead on ESG
Our AI-powered platform helps banks, insurers, and asset managers:
- Spot ESG disclosure gaps in minutes, not months
- Benchmark performance against peers and regulatory expectations
- Map regulatory frameworks like CSRD and IFRS S2 to internal data
- Free up time for strategic decision-making by automating manual reviews
Financial institutions face a unique set of sustainability pressures. But they also have the power to shape markets and accelerate climate action. With the right tools, ESG can become a source of clarity and momentum.
Want to learn how your institution can turn ESG insights into a competitive advantage?
