Lesson 4.2: Climate and Nature Risk Frameworks

01

Overview

Where This Lesson Fits

This is the second of six lessons in Module 4: Green Finance Products and Services. Building on Lesson 4.1's risk taxonomy (physical, transition, liability), this lesson introduces the global frameworks for systematically assessing and managing those risks. The TCFD provides the four-pillar structure adopted by regulators worldwide, while the TNFD extends the approach to nature-related financial risks.

Pedagogical arc: Now that you can classify risks, learn the global frameworks for assessing them.

Learning Outcomes

Explain the TCFD four-pillar framework and why the Risk Management pillar is the operational core
Apply the TNFD LEAP approach to identify nature-related financial risks
Integrate climate risk into Enterprise Risk Management (ERM) processes
Score institutional TCFD Risk Management maturity using a standardized rubric
Compare ASEAN regulatory approaches to TCFD implementation

Prerequisites

Lesson 4.1 (Climate-Related Financial Risks: Taxonomy, Transmission, and Materiality) is recommended. Familiarity with basic risk classification (physical, transition, liability) and transmission channels will allow you to engage more deeply with the frameworks presented here.

02

Slide Deck

Lecture Slides (33 Slides)

Download Slide Deck (PDF)

03

Foundation Level

TCFD Four Pillars

The Task Force on Climate-related Financial Disclosures (TCFD) structures climate risk management around four interconnected pillars. Each pillar has specific recommended disclosures, but together they form a coherent system in which governance enables strategy, strategy requires risk management, and risk management produces the metrics and targets that complete the loop.

The Four Pillars

Governance — Board-level oversight and management's role in assessing and managing climate-related risks. Who is responsible? What committees exist? How frequently does the board review climate issues?
Strategy — The actual and potential impacts of climate-related risks and opportunities on the organization's business, strategy, and financial planning over short, medium, and long-term horizons.
Risk Management — The processes for identifying, assessing, and managing climate-related risks. This is the operational core of TCFD implementation and the primary focus of this lesson.
Metrics & Targets — The quantitative indicators used to assess and manage climate-related risks: GHG emissions (Scope 1, 2, 3), climate-related targets, and performance against those targets.

ASEAN ExampleThe Bank of Thailand (BOT) mandated TCFD-aligned disclosures for large commercial banks from 2024, making Thailand one of the first ASEAN jurisdictions to move from voluntary to mandatory TCFD adoption. The BOT framework explicitly requires reporting across all four pillars, with particular emphasis on the Risk Management pillar for prudential supervision purposes.

Risk Management Pillar Deep Dive

The Risk Management pillar contains three sub-recommendations, each targeting a distinct stage of the risk management cycle. These sub-recommendations form the basis of the TCFD scoring rubric used in this lesson's quantitative lab.

Sub-Recommendation A: Identify

Describe the organization's processes for identifying climate-related risks. Concrete activities include:

Mapping physical and transition risk exposures across business lines and geographies
Conducting scenario analysis to identify risks under different climate pathways
Engaging with sector-specific guidance (e.g., TCFD sector supplements for banking, insurance, energy)
Establishing climate risk registers integrated with existing operational risk registers

Sub-Recommendation B: Assess

Describe the organization's processes for assessing climate-related risks. Concrete activities include:

Quantifying the potential size and scope of identified climate risks
Evaluating the likelihood and impact of climate risks across time horizons
Prioritizing climate risks relative to other risks using consistent scoring methodologies
Conducting stress testing under multiple NGFS climate scenarios

Sub-Recommendation C: Manage

Describe the organization's processes for managing climate-related risks. Concrete activities include:

Implementing risk mitigation strategies (hedging, diversification, engagement)
Setting risk appetite thresholds for climate-related exposures
Integrating climate considerations into credit approval, investment, and underwriting decisions
Monitoring and reporting on risk management effectiveness

ASEAN ExampleThe Monetary Authority of Singapore (MAS) Guidelines on Environmental Risk Management for Banks (2020, updated 2022) explicitly map to the TCFD Risk Management sub-recommendations, requiring banks to demonstrate identification, assessment, and management processes for environmental risks, including climate, as part of their ICAAP submissions.

Enterprise Risk Management Integration

Effective climate risk management does not require building a parallel risk infrastructure. Instead, climate risk should be embedded into existing Enterprise Risk Management (ERM) frameworks. The same risk appetite statements, risk registers, committee structures, and reporting lines that govern credit, market, and operational risk should be extended to encompass climate risk.

Integration Principles

Same risk appetite framework — Climate risk tolerance is expressed within the institution's overall risk appetite statement, not as a separate policy document
Same risk register — Climate risks are added to the existing risk register alongside credit, market, operational, and liquidity risks
Same committee structure — The Board Risk Committee and Chief Risk Officer have explicit climate risk oversight responsibilities
Same escalation processes — Climate risk breaches trigger the same escalation and remediation workflows as other risk types

Practical Example

A bank embedding climate into its ERM would add "physical flood risk to mortgage portfolio" as a line item in its credit risk register, scored using the same likelihood-impact matrix as other credit risks, reviewed by the same credit risk committee, and subject to the same risk appetite limits. The climate element is the new risk factor; everything else uses existing infrastructure.

ASEAN ExampleBangkok Bank, one of Thailand's largest commercial banks, integrated climate risk into its existing ERM framework in 2023 by adding climate-related risk factors to its credit risk assessment criteria for corporate lending. Agricultural loans in flood-prone provinces now include a climate vulnerability score as part of the standard credit approval checklist.

TNFD and the LEAP Approach

The Taskforce on Nature-related Financial Disclosures (TNFD) extends the TCFD framework to encompass nature-related risks — risks arising from biodiversity loss, ecosystem degradation, and natural resource depletion. The TNFD introduces the LEAP approach, a four-phase process for identifying and assessing nature-related financial risks.

L — Locate

Spatial mapping of the organization's interface with nature. Where are the business activities, assets, and value chains located? What ecosystems and biomes do they interact with? This phase uses geospatial tools like IBAT (Integrated Biodiversity Assessment Tool) and ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure).

E — Evaluate

Assessment of dependencies and impacts. What ecosystem services does the organization depend on (e.g., water purification, pollination, flood regulation)? What impacts does it have on nature (e.g., deforestation, pollution, habitat fragmentation)?

A — Assess

Translation of dependencies and impacts into financial risks and opportunities. What are the material nature-related financial risks? How do they interact with existing climate risk assessments? What is the magnitude and likelihood of financial losses?

P — Prepare

Response and reporting. What strategies will the organization adopt to manage nature-related risks? How will it report on nature-related financial risks using the TNFD disclosure recommendations?

ASEAN ExampleA palm oil lender in Malaysia applying LEAP would: (L) map plantation locations against deforestation frontiers in Borneo using satellite data; (E) evaluate dependencies on pollination and water regulation services; (A) assess financial risks from EU Deforestation Regulation penalties and reputational damage; (P) prepare transition plans and TNFD-aligned disclosures for affected loan portfolios.

Nature-Finance Link

Nature underpins economic activity at a fundamental level. The World Economic Forum estimated in 2020 that $44 trillion of global GDP — more than half of the world total — is moderately or highly dependent on nature and its services. When ecosystems degrade, the financial system faces material risks that are distinct from, but deeply interconnected with, climate risks.

Key Nature-Finance Transmission Channels

Deforestation — Loss of carbon sinks accelerates climate change; reduces ecosystem services (water regulation, soil stability); creates regulatory risk from EU Deforestation Regulation and similar frameworks
Water stress — Agriculture, energy, mining, and manufacturing depend on reliable water supplies. Water scarcity increases operational costs, reduces output, and can trigger credit defaults in exposed sectors
Pollinator loss — 75% of global food crop types rely on animal pollination. Declining pollinator populations directly threaten agricultural productivity and food security, with cascading effects on agricultural lending portfolios
Soil degradation — Loss of topsoil fertility reduces agricultural yields, increases input costs, and erodes land values used as collateral
Marine ecosystem decline — Coral bleaching, overfishing, and ocean acidification threaten fisheries, tourism, and coastal protection services worth hundreds of billions annually

ASEAN ExampleSoutheast Asia contains four of the world's 36 biodiversity hotspots and is experiencing rapid deforestation for palm oil, rubber, and timber plantations. Indonesian and Malaysian banks with concentrated exposure to these sectors face compounding nature-related financial risks: regulatory penalties from the EU Deforestation Regulation, reputational damage from civil society campaigns, and physical risks from degraded watershed services.

04

Intermediate Level

TCFD Implementation for Risk Assessment

Moving from TCFD recommendations to operational risk processes requires translating high-level principles into concrete institutional practices. This card outlines the implementation pathway for financial institutions.

Implementation Phases

Phase	Activities	Timeline	Output
1	Gap analysis: map existing risk processes against TCFD recommendations	Months 1–3	Gap assessment report
2	Governance setup: establish board oversight, assign CRO responsibilities	Months 3–6	Updated risk governance charter
3	Risk identification: conduct initial climate risk screening across portfolios	Months 6–12	Climate risk register
4	Scenario analysis: run NGFS scenarios through credit and market risk models	Months 12–18	Scenario analysis results
5	Integration: embed climate risk into BAU credit, investment, and reporting processes	Months 18–24	Integrated ERM framework

ASEAN ExampleDBS Bank (Singapore) completed its TCFD implementation over a 24-month period (2020–2022), moving from initial gap analysis to full integration of climate risk into its credit approval processes. The bank now includes carbon intensity thresholds in its sector-specific lending policies for power generation, palm oil, and shipping.

TNFD Sector Guidance

The TNFD provides sector-specific guidance that goes beyond general principles to offer tailored recommendations for industries with high nature dependencies and impacts.

Financial Institutions

Apply LEAP at the portfolio level to assess aggregate nature-related exposures
Map financed activities to biodiversity-sensitive areas using geospatial overlays
Assess nature dependencies in credit portfolios (agriculture, fisheries, forestry, mining)
Develop nature-positive lending criteria and exclusion policies for highest-risk activities

Agriculture

Assess dependencies on pollination, soil health, and water availability at farm/plantation level
Map supply chains against deforestation frontiers and protected areas
Quantify financial exposure to regulatory risk (EU Deforestation Regulation, biodiversity credits)

Extractives

Locate operations relative to Key Biodiversity Areas (KBAs) and World Heritage Sites
Assess water stress exposure using WRI Aqueduct tools
Evaluate mine closure and rehabilitation liabilities under nature-positive standards

ASEAN ExampleCIMB Group (Malaysia), a major financier of palm oil plantations, began applying TNFD sector guidance in 2024, mapping its palm oil portfolio against satellite-derived deforestation alerts in Sabah and Sarawak. The analysis identified 12% of financed plantations within 5km of intact forest frontiers, flagging them for enhanced due diligence.

Basel III/IV Integration

The Basel Committee on Banking Supervision (BCBS) published its Principles for the Effective Management and Supervision of Climate-Related Financial Risks in 2022, establishing how climate risk should be integrated into the three pillars of Basel III/IV.

Pillar 1: Minimum Capital Requirements

Climate-adjusted risk weights for credit exposures to carbon-intensive sectors
Scenario-based capital add-ons for concentrated climate exposures
Incorporation of climate factors into Internal Ratings-Based (IRB) PD and LGD models

Pillar 2: Supervisory Review (ICAAP)

Climate stress testing as part of the Internal Capital Adequacy Assessment Process
Supervisor-mandated scenario analysis (e.g., NGFS scenarios as reference)
Assessment of bank governance and risk management for climate risks
Potential Pillar 2 capital surcharges for inadequate climate risk management

Pillar 3: Market Discipline (Disclosure)

Standardized climate risk disclosures aligned with TCFD/ISSB S2
Quantitative metrics: GHG emissions, climate VaR, transition plan targets
Qualitative disclosures: governance arrangements, risk management processes, strategy

Climate-Adjusted Capital Requirement (Conceptual)

$$K_{\text{climate}} = K_{\text{base}} \times (1 + \alpha_{\text{climate}} \cdot \text{Exposure}_{\text{climate}})$$

where $K_{\text{base}}$ is the standard Basel capital requirement, $\alpha_{\text{climate}}$ is the climate sensitivity factor (regulatory parameter), and $\text{Exposure}_{\text{climate}}$ is the proportion of the portfolio in climate-sensitive sectors.

Worked Example: Thai Bank TCFD Scoring

Apply the TCFD Risk Management scoring rubric to a hypothetical Thai commercial bank. The rubric scores four dimensions on a 0–3 scale, producing a total score out of 12.

Scoring Rubric

Dimension	0 — Absent	1 — Basic	2 — Developing	3 — Advanced
Identification	No climate risk identification process	Ad hoc identification; no systematic process	Systematic screening; climate risk register exists	Comprehensive identification integrated into all business lines
Assessment	No quantification of climate risks	Qualitative assessment only	Some quantitative metrics; limited scenario analysis	Full scenario analysis with multiple NGFS pathways
Management	No climate risk mitigation	Generic policies; no enforcement	Sector-specific policies; some integration into credit decisions	Climate risk embedded in all risk decisions; active portfolio steering
Integration	Climate risk siloed from ERM	Climate risk reported separately	Climate risk in risk register; reviewed by risk committee	Full ERM integration; climate in risk appetite statement

Example Scores: Siam Commercial Bank (Hypothetical)

2/3

Identification

1/3

Assessment

2/3

Management

1/3

Integration

Total TCFD Risk Management Maturity Score

$$\text{Score}_{\text{total}} = 2 + 1 + 2 + 1 = 6 / 12 \quad \text{(Developing)}$$

Interpretation: The bank has systematic risk identification and sector-specific management policies, but lags on quantitative assessment (limited scenario analysis) and full ERM integration. Priority actions: (1) implement NGFS scenario analysis, (2) include climate risk in the board risk appetite statement.

05

PhD Extension

TCFD Effectiveness

Krueger, Sautner & Starks (2020) conducted one of the most influential empirical studies on whether institutional investors actually incorporate climate risks into their decision-making. Surveying 439 institutional investors globally, they found a stark gap between awareness and action.

Key Findings

43% of institutional investors consider climate risks as important as other investment risks
But only 25% had actually adjusted their portfolio allocation based on climate risk assessments
The awareness-action gap is largest for physical risks, which investors acknowledge but find hardest to quantify
Investors with longer time horizons (pension funds, sovereign wealth funds) are significantly more likely to act on climate risk
Regulatory pressure is the strongest motivator for incorporating climate risk, followed by fiduciary duty concerns

Implications for TCFD

The study suggests that TCFD disclosure alone may be insufficient to change behavior. Mandatory disclosure, combined with supervisory expectations and capital requirements, appears necessary to close the awareness-action gap. This finding has directly influenced the transition from voluntary TCFD to mandatory ISSB S2.

Research QuestionHas the awareness-action gap identified by Krueger et al. (2020) narrowed since the introduction of mandatory TCFD-aligned disclosure regimes in the UK (2022), Japan (2023), and Australia (2024)? What is the gap for ASEAN institutional investors specifically?

TNFD Data Challenges

While TCFD benefits from relatively mature data infrastructure (GHG emissions accounting, climate scenarios), TNFD implementation faces fundamental data and measurement challenges that make nature-related risk assessment significantly harder.

Three Core Challenges

Spatial resolution — Nature risks are highly location-specific. A forest in Borneo has different biodiversity value than one in Scandinavia. Unlike carbon emissions (which are globally fungible), nature impacts require high-resolution geospatial data that is often unavailable for ASEAN supply chains
Biodiversity metrics — There is no single, universally accepted metric for biodiversity comparable to tonnes of CO2 equivalent. Competing metrics include species richness, Mean Species Abundance (MSA), Biodiversity Intactness Index (BII), and STAR (Species Threat Abatement and Restoration). Each has different strengths and limitations
Dependency mapping — Quantifying financial dependence on specific ecosystem services requires understanding complex ecological-economic linkages. How much does a bank's agricultural portfolio actually depend on pollination services? The tools (ENCORE, IBAT) provide qualitative assessments but lack the quantitative precision needed for financial risk modeling

Emerging Solutions

Satellite-based monitoring (Global Forest Watch, Planet Labs) provides near-real-time deforestation alerts
Environmental DNA (eDNA) sampling enables rapid biodiversity assessment
TNFD's own data architecture (the TNFD Data Catalogue) aims to standardize available datasets

Research QuestionWhat minimum spatial resolution and temporal frequency of biodiversity data would be sufficient for ASEAN financial institutions to conduct meaningful nature-related risk assessments? What are the costs of achieving this data quality for portfolio-level LEAP analysis?

Regulatory Evolution: Voluntary TCFD to Mandatory ISSB S2

The journey from voluntary TCFD recommendations (2017) to mandatory ISSB S2 standards (2024) represents an 8-year transition that fundamentally changed the regulatory landscape for climate risk disclosure.

Timeline

Year	Milestone	Status
2017	TCFD Final Recommendations published	Voluntary
2019	NGFS publishes first climate scenarios for central banks	Advisory
2020	UK FCA mandates TCFD for premium-listed companies	Mandatory (UK)
2021	G7 commits to mandatory TCFD-aligned disclosure	Political commitment
2022	BCBS publishes climate risk principles; MAS finalizes environmental risk guidelines	Supervisory expectations
2023	ISSB publishes IFRS S2; TCFD disbanded (mission transferred to ISSB)	Global baseline
2024	ISSB S2 adoption begins in 20+ jurisdictions; BOT mandates TCFD alignment	Mandatory (expanding)

Implications

The voluntary-to-mandatory transition demonstrates that market forces alone were insufficient to drive adequate climate risk disclosure. The regulatory ratchet — from voluntary recommendations to supervisory expectations to legally binding standards — reflects a fundamental lesson: disclosure without mandate produces uneven adoption and limited behavioral change.

Research QuestionWhat explains the variation in TCFD adoption rates across ASEAN jurisdictions? Is the pace of adoption better explained by financial sector development, climate vulnerability, regulatory capacity, or international pressure from trade partners?

Double Materiality in Practice

The concept of double materiality lies at the intersection of TCFD (financial materiality) and TNFD (impact materiality), and represents the most comprehensive approach to risk assessment. The EU's Corporate Sustainability Reporting Directive (CSRD) mandates double materiality assessment, while the ISSB S2 focuses on financial materiality. This philosophical divergence has practical consequences for how risks are identified, assessed, and managed.

Reconciling Two Perspectives

Dimension	Financial Materiality (ISSB)	Impact Materiality (GRI/ESRS)	Double Materiality (EU CSRD)
Question	How does climate/nature affect our financial performance?	How do our activities affect climate/nature?	Both directions simultaneously
Audience	Investors and creditors	Society and stakeholders	All stakeholders
Scope	Risks that affect enterprise value	Impacts regardless of financial effect	Union of both scopes
ASEAN adoption	Singapore (MAS), Hong Kong (SFC)	Limited formal adoption	Emerging in EU trade-partner contexts

Research QuestionAs ASEAN regulators converge on climate disclosure standards, will they adopt the ISSB single-materiality approach or move toward EU-style double materiality? What are the capacity and cost implications of double materiality assessment for ASEAN banks with less sophisticated risk infrastructure?

06

Quantitative Lab

TCFD Risk Management Scoring & Radar Chart

Task Score TCFD Risk Management pillar disclosures for 10 ASEAN financial institutions Method Rubric-based scoring (0–3 per sub-criterion, 4 dimensions) Output Radar chart comparing institutions across scoring dimensions Tools Python matplotlib numpy

Scoring Rubric

Dimension	0 — Absent	1 — Basic	2 — Developing	3 — Advanced
Identification	No climate risk identification	Ad hoc; no formal process	Systematic screening with risk register	Comprehensive, all business lines
Assessment	No quantification	Qualitative only	Some quantitative; limited scenarios	Full NGFS scenario analysis
Management	No mitigation	Generic policies	Sector-specific; some credit integration	Embedded in all risk decisions
Integration	Siloed from ERM	Separate reporting	In risk register; committee review	Full ERM; in risk appetite statement

Python Pseudocode

import numpy as np
import matplotlib.pyplot as plt

# TCFD Risk Management scores (0-3) for each institution
institutions = ['DBS', 'OCBC', 'Bangkok Bank', 'SCB',
                'BDO', 'Vietcombank', 'CIMB', 'Maybank',
                'Krungthai', 'BPI']
dimensions = ['Identification', 'Assessment',
              'Management', 'Integration']

# Score matrix: rows = institutions, cols = dimensions
scores = np.array([
    [3, 3, 3, 3],  # DBS (advanced)
    [3, 2, 2, 2],  # OCBC
    [2, 1, 2, 1],  # Bangkok Bank
    # ... score remaining institutions
])

# Radar chart construction
angles = np.linspace(0, 2 * np.pi, len(dimensions), endpoint=False)
angles = np.concatenate((angles, [angles[0]]))

fig, ax = plt.subplots(figsize=(8, 8), subplot_kw={'polar': True})
for i, inst in enumerate(institutions):
    values = np.concatenate((scores[i], [scores[i][0]]))
    ax.plot(angles, values, label=inst)
    ax.fill(angles, values, alpha=0.1)

ax.set_xticks(angles[:-1])
ax.set_xticklabels(dimensions)
ax.set_ylim(0, 3)
ax.legend(loc='upper right', bbox_to_anchor=(1.3, 1.0))
plt.savefig('tcfd_radar_chart.pdf', bbox_inches='tight')
            

Lab Steps

Select 10 ASEAN financial institutions from the TCFD Knowledge Hub supporters list. Download their most recent annual or sustainability reports.
For each institution, read the Risk Management disclosure section and score each of the four dimensions (Identification, Assessment, Management, Integration) on the 0–3 rubric above.
Record scores in a structured spreadsheet or Python array. Calculate total scores (out of 12) and classify each institution: 0–3 = Absent, 4–6 = Basic, 7–9 = Developing, 10–12 = Advanced.
Construct a radar chart using the Python template above. Overlay all 10 institutions on a single chart to enable visual comparison across dimensions.
Write a 300-word analysis identifying: (a) which dimension shows the largest cross-institution variation, (b) whether Singapore-based banks score systematically higher, and (c) what specific improvements the lowest-scoring institutions should prioritize.

Data Sources

TCFD Knowledge Hub BOT Sustainable Finance MAS Environmental Risk

07

Case Study: Thailand — BOT TCFD Implementation

Bank of Thailand — From 2011 Floods to TCFD Mandate

Regulatory Context

The Bank of Thailand (BOT) mandated TCFD-aligned disclosures beginning in 2024, making it one of the most proactive central banks in ASEAN on climate risk regulation. The policy was shaped by Thailand's direct experience with catastrophic climate events and the recognition that the financial system requires systematic climate risk management.

The 2011 Floods as Catalyst

Thailand's 2011 floods caused an estimated $46.5 billion in economic damage — one of the costliest natural disasters in history. Over 800 factories in seven industrial estates north of Bangkok were inundated, disrupting global supply chains for hard drives, automotive parts, and electronics. The financial sector impact was severe:

Non-performing loan ratio in flood-affected areas increased from 3.2% to 8.7%
Insurance industry losses exceeded $15 billion, with several insurers requiring capital injections
GDP contracted by 9% in Q4 2011 before recovering in 2012
The BOT was forced to implement emergency liquidity facilities for affected banks

Phased Implementation

Phase	Scope	Timeline	Requirements
Phase 1	Large commercial banks (D-SIBs)	2024	Full TCFD four-pillar disclosure; climate stress testing; risk appetite integration
Phase 2	All commercial banks	2025	TCFD disclosure (phased); risk identification and initial scenario analysis
Phase 3	Specialized financial institutions	2026+	Proportionate TCFD requirements; sector-specific guidance

Three-Country Comparison Exercise

Compare the regulatory approaches of three ASEAN central banks to TCFD implementation:

Dimension	BOT (Thailand)	MAS (Singapore)	SBV (Vietnam)
Mandate type	Mandatory (phased)	Mandatory (2022)	Voluntary (emerging)
Scope	All banks (phased)	All banks, insurers, asset managers	Large state-owned commercial banks
Scenario analysis	Required (NGFS-aligned)	Required (industry stress test 2022)	Not yet required
Nature/TNFD	Under consideration	Biodiversity guidance published 2024	Not yet addressed
Key driver	2011 flood experience	Financial center competitiveness	World Bank technical assistance

Discussion Questions

Discussion 1Why did Thailand choose a phased approach rather than applying TCFD requirements to all banks simultaneously? What are the advantages and risks of this approach compared to Singapore's uniform mandate?

Discussion 2Vietnam's SBV has not yet mandated TCFD-aligned disclosures. Given that Vietnam faces comparable physical climate risks to Thailand, what factors explain the different regulatory pace? What role do international organizations (World Bank, ADB) play in accelerating adoption?

Discussion 3The 2011 floods cost Thailand $46.5 billion. If a similar event occurred today, how would TCFD-aligned risk management practices have changed the financial sector's preparedness and recovery? What specific improvements would the Risk Management pillar have produced?

08

Key Concepts

Glossary (17 Terms)

Basel III/IV: International regulatory framework for banks setting minimum capital, leverage, and liquidity requirements. Climate risk integration is addressed through all three pillars: capital (Pillar 1), supervisory review (Pillar 2), and disclosure (Pillar 3).
Climate risk assessment: The systematic process of identifying, analyzing, and evaluating climate-related risks to an organization's financial performance, strategy, and operations across multiple time horizons and scenarios.
Double materiality: The EU CSRD framework requiring assessment of both how climate/nature affects firm value (financial materiality) and how the firm's activities affect climate/nature outcomes (impact materiality).
Enterprise Risk Management (ERM): An integrated framework for managing all risks facing an organization through a unified risk appetite, risk register, committee structure, and reporting process. Climate risk should be embedded within ERM, not managed separately.
Financial materiality: The ISSB/IFRS approach: a climate or nature risk is material if it could reasonably influence investor decisions about enterprise value. Outside-in perspective focused on risks to the firm.
Governance pillar: TCFD Pillar 1: the organization's board-level oversight and management's role in assessing and managing climate-related risks and opportunities.
ICAAP: Internal Capital Adequacy Assessment Process. A Basel Pillar 2 requirement where banks assess their own capital needs, including for climate-related risks, subject to supervisory review and potential capital add-ons.
Impact materiality: The GRI/ESRS approach: a firm's climate or nature impacts are material regardless of whether they affect the firm's own financial performance. Inside-out perspective focused on the firm's effects on the world.
ISSB S2: IFRS S2 Climate-related Disclosures, published 2023. The global baseline standard for climate disclosure, building on and superseding the TCFD recommendations. Focuses on financial materiality for investor decision-making.
LEAP approach: The TNFD's four-phase process for nature-related risk assessment: Locate (spatial mapping), Evaluate (dependencies and impacts), Assess (risks and opportunities), Prepare (respond and report).
Metrics & Targets pillar: TCFD Pillar 4: the quantitative indicators used to assess and manage climate-related risks, including GHG emissions (Scope 1, 2, 3), climate-related targets, and performance tracking.
Nature-related financial risk: Financial risks arising from biodiversity loss, ecosystem degradation, and natural resource depletion. Includes dependency risks (reliance on ecosystem services) and impact risks (regulatory and reputational consequences of harming nature).
Risk Management pillar: TCFD Pillar 3: the operational core of the TCFD framework. Covers processes for identifying, assessing, and managing climate-related risks, with three sub-recommendations (identify, assess, manage).
Scenario analysis (TCFD): The use of hypothetical future climate pathways (e.g., NGFS scenarios) to assess how climate risks would affect an organization's strategy, financial performance, and resilience under different temperature outcomes.
Strategy pillar: TCFD Pillar 2: the actual and potential impacts of climate-related risks and opportunities on the organization's business model, strategy, and financial planning across time horizons.
TCFD: Task Force on Climate-related Financial Disclosures. Established by the FSB in 2015, published recommendations in 2017, disbanded in 2023 with mission transferred to the ISSB. The four-pillar structure (Governance, Strategy, Risk Management, Metrics & Targets) remains the global standard.
TNFD: Taskforce on Nature-related Financial Disclosures. Published recommendations in 2023, extending the TCFD approach to nature-related risks using the LEAP framework. Addresses biodiversity loss, ecosystem degradation, and nature dependencies.

09

References

Key References

2023 TCFD. "Final Report: Recommendations of the Task Force on Climate-Related Financial Disclosures." Financial Stability Board.
2023 TNFD. "Recommendations of the Taskforce on Nature-related Financial Disclosures." TNFD.
2020 Krueger, P., Sautner, Z., & Starks, L.T. "The Importance of Climate Risks for Institutional Investors." Review of Financial Studies, 33(3), 1067–1111.
2023 Bank of Thailand. "Sustainable Finance Framework and TCFD Guidelines for Financial Institutions." BOT.
2022 MAS. "Guidelines on Environmental Risk Management for Banks." Monetary Authority of Singapore.

Supplementary References

2022 BCBS. "Principles for the Effective Management and Supervision of Climate-Related Financial Risks." Basel Committee on Banking Supervision.
2020 WEF. "Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy." World Economic Forum.
2023 ISSB. "IFRS S2: Climate-related Disclosures." International Sustainability Standards Board.

10

Downloads

Materials

Download Slide Deck (PDF)

Data Resources

TCFD Knowledge Hub BOT Sustainable Finance MAS Environmental Risk