Climate and ESG challenges in financial services

Explore challenges, regulatory pressures and actions to take.

The disruptions that affected all industries in 2020 will forever reshape the financial services industry. With such changes come regulatory and public policy challenges and concerns, which in 2021 will begin to inform the future, altering our view of the course to take. 

Here, from the KPMG report Ten key regulatory challenges of 2021, we share insights related to climate as well as environmental, social, and corporate governance (ESG).


Multiple standards and frameworks for measuring and reporting ESG risks currently exist, put together by international forums, central banks, academics, and private sector stakeholders. They are mostly voluntary and not directly comparable making it challenging for stakeholders, including financial services companies, regulators, and investors to objectively assess ESG risks—and commitment—among companies, products, and/or investments. Industry advisory groups are strongly encouraging the U.S. financial services regulators to adopt a standardized framework and consistent taxonomies. However, much like the industry itself, the regulators are just beginning to understand ESG risks and are in the early stages of exploring how to monitor, measure, and report them. For 2021, the regulatory focus is clearly centered on climate change, a sub-element of “E” factors, though consideration will also be devoted to diversity (an “S” factor) and corporate commitment (among the “G” factors).

Today, financial services regulators have the jurisdictional authority needed to set forth supervisory expectations for addressing financial climate-related risks, and ESG risks more generally, without requirement for additional rulemaking. Broadly, these authorities cover oversight of systemic financial risk, risk management of particular markets and financial institutions, disclosure and investor protection, and safeguarding of financial sector utilities. As regulators begin to set expectations, individual companies have publicly announced their commitment to ESG policies across their investment strategies, due diligence, and risk processes and are actively encouraging others to do the same. Examples include:

  • pledging to reduce reliance on fossil fuels and related products
  • promoting ESG disclosures aligned with the SASB and the TCFD
  • pledging to address racial inequality through financial products and investments
  • expanding product offerings that meet ESG expectations/standards
  • issuing bonds targeted to social equality and environmental sustainability
  • committing to adopt the metrics and disclosure in the Measuring Stakeholder Capitalism paper published by the International Business Council of the World Economic Forum
  • developing strategies to reduce exposure to clients that do not meet certain ESG criteria.

Regulatory pressures

The momentum to account for ESG issues is unmistakable and, although U.S. financial services regulators have been characterized as “reluctant participants,” they do engage with international ESG-related initiatives, including the FSB’s TCFD and the BCBS’s TFCR. Independently, the FRB and CFTC have specifically called out climate change as posing serious emerging risks to U.S. financial stability including spillover effects that may exacerbate vulnerabilities in the financial system unrelated to climate change. Regulatory attention is being directed toward issues related to disclosure, reporting, and company policies and procedures; there is increasing pressure on regulators to:

  • fully participate in international efforts to establish ESG standards and metrics, with an initial focus on establishing uniform international measures for climate change risk
  • incorporate ESG-related risk management, and climate risk in particular, into bank and nonbank regulatory and supervisory frameworks where the regulators have authorities, including systemic financial risk oversight, risk management, and disclosure and investor protection
  • clarify the definition of “materiality,” including qualitative and quantitative factors, for purposes of meeting regulatory expectations to identify, measure, monitor, and control material risks as well as public disclosure requirements
  • mandate bank and nonbank financial services companies address climate risk and ESG issues through their existing risk management and governance frameworks, including stress testing (for climate, this includes assessment against a consistent and common set of broad risk scenarios, guidelines, and assumptions) and capital requirements
  • develop (for “E,” “S,” and “G” factors) common taxonomies and underlying definitions, risk data and data collection, analytical tools, and financial products to be used across financial and nonfinancial reporting with an eye to achieving standardized, comparable, and reliable disclosure
  • understand the roots of racial, social, and economic disparities and inequities within the organization and in the delivery of financial products and services, and implement changes.

8 actions to take

  1. Define the organization’s approach/responsibilities to Climate Risk and ESG, including customer and third-party relationships, across strategies, policies, practices, and mandates; establish targets and timelines to incorporate Climate Risk and ESG decisioning and reporting.
  2. Develop a roadmap and strategy to measure and assess Climate and ESG-related impacts across any or all key risk areas (e.g., operational, reputational, credit, compliance, liquidity, strategic, model, market, and due diligence).
  3. Assess exposure from physical and transition risks across asset classes and define how those exposures impact strategic planning for Climate and ESG risk management.
  4. Identify and procure needed data sets to forecast physical risk; incorporate into bank systems, scenario analysis, economic modeling and stress testing.
  5. Align internal definitions with evolving regulatory taxonomies to include Climate Risk and ESG-related impacts (e.g., what “ESG” encompasses, what is “green”, what is “sustainable”).
  6. As global standards evolve, focus on the integrity of Climate Risk and ESG-related financial data and controls (just like SOX).
  7. Establish policies and controls in the business and risk management processes to mitigate Climate and ESG-related reputational risks in a timely manner and through proactive monitoring and identification.
  8. Operationalize a disclosure and reporting framework, locally and globally, for consistency with the firm’s ESG mandate/policy aligned with SEC regulations, TCFD standards, SASB standards and others, as appropriate.

Amy S. Matsuo

Amy S. Matsuo

Regulatory and ESG Insights Leader, KPMG US

+1 919-664-7100
Steven Arnold

Steven Arnold

Financial Services Advisory Leader, KPMG US

+1 213-430-2110