Most institutional investors today have responsible investment frameworks, sustainability policies, climate disclosures and a supporting governance structure in place. The focus is now shifting to how investors translate sustainability risks into decision-useful information that supports investment and risk management decisions.
In a recent survey on climate risk and resilience by industry platform Responsible Investor, more than three quarters of the over 100 institutional asset owners and asset managers that participated, indicated they had assessed the impact of physical climate risks on at least some portion of their investments. But the maturity of integration varies significantly, not just between investors, but also within the same organisation between different asset classes. Most identified hurdles were data inconsistencies, modelling uncertainty and a lack of standardised approaches.
This article forms part of a series on the evolving role of sustainability risk in asset management. Sustainability risk captures a wide range of physical climate risk, transition risk, nature-related risks and biodiversity but sometimes also social and governance factors. What sustainability means in practice can therefore differ across investors depending on their objectives, policies, products and operating environment.
The series starts with a focus on physical climate risk as a tangible example of the broader sustainability integration challenge. This article explores why sustainability and climate risk integration is becoming increasingly important, while the second article discusses practical implementation considerations and presents a stepwise framework to apply. Later articles will build on these foundations by broadening the scope to other sustainability risks.
The real-world impacts from climate risks are no longer distant. Extreme weather events, droughts, floods and heatwaves are becoming more frequent and increasingly costly for businesses, governments and communities. For example, European Environmental Agency research estimated the economic loss from weather- and climate-related extremes in the European Union at over EUR 200 billion between 2021 and 2024.
Supervisory authorities are also increasing their focus on sustainability risk integration. Regulators increasingly see the identification, assessment and management of sustainability risks as part of sound risk management and fiduciary responsibility. In recent observations, the Dutch Central Bank (DNB) acknowledged the progress made by the sector but noted that implementation remains uneven in scope, depth and quality. DNB expects organisations to move beyond high-level assessments and develop approaches that are decision-useful and relevant to their actual portfolios. It indicated climate and nature-related risk integration will remain a supervisory priority in the coming years and to support institutions DNB has updated its climate and nature risk integration best practices guide.
For investors, the urgency is twofold. Climate-related events are becoming more frequent and financially material, while regulators are increasing their scrutiny. Investors therefore need to move beyond broad commitments and high-level assessments. The focus turns to robust, data-driven approaches that reveal risk at the individual investment level, show how risks may become financially material under different scenarios, and provide boards with decision-useful information on portfolio resilience, risk appetite and strategic asset allocation.
More and better sustainability risk integration is not a one-time exercise, but continuous work. Beyond the immediate urgency, there are three structural trends that put an ongoing ask on the sector to focus on the topic and dedicate capacity and expertise over a longer horizon.
The sustainability regulatory landscape continues to evolve, creating a recurring need for institutional investors to adapt. Sustainability regulation is no longer a matter of implementing a single framework and moving on. Requirements are regularly refined, simplified or expanded, affecting how investors classify products, assess sustainability risks, conduct due diligence and report to stakeholders. As regulations change, organisations must review their policies, processes, data and governance arrangements to remain aligned with regulatory expectations.
Recent developments illustrate this challenge. Proposed amendments to the landmark Sustainable Finance Disclosure Regulation (SFDR) would shift the regulation from its current disclosure-focused form to a simpler and more transparent sustainability categorisation system. The overhaul is expected to come into effect by 2028 and would require investors to adjust product offerings, labels, benchmark selection, portfolio data and reporting processes. Another example is the EU Omnibus legislation adopted in early 2026, which affects the EU Taxonomy, CSRD and CSDDD legislation. By reducing both the number of companies in scope and overall reporting requirements, it is expected to lower the availability of sustainability information from investee companies. As a result, investors will need to adapt their due diligence approaches and data processes accordingly.
Climate science, sustainability data and analytics are changing fast. New climate scenarios, improved modelling techniques, higher-quality physical risk datasets and advances in artificial intelligence are continuously improving the tools available to investors. At the same time, these developments create new questions around methodology, assumptions and comparability of data. Organisations must decide which data sources and analytical tools best support decision-making, and when key assumptions need to be updated.
Recent updates to climate scenarios by the Coupled Model Intercomparison Project (CMIP) illustrate this challenge. Many organisations have built climate risk assessments around scenario assumptions that will require a refresh as scientific understanding has evolved. For example, the most severe emission scenario was dropped by a leading scientific body: a scenario reliant on strong growth in fossil fuel usage, which is overtaken by the reality of rapidly falling cost of renewables, the emergence of climate policy and recent emission trends. But the most optimistic scenario where global warming would remain below 1.5°C by 2050 is also no longer considered plausible because of the emission levels already reached. The practical consequence is that assessments built two or three years ago may now be anchored at both ends of the range by outdated scenarios.
What is expected of investors and boards is also changing. Pension scheme beneficiaries, clients and society increasingly expect sustainability-related ambitions, not only managing climate risks. Ambitions should be accompanied by measurable outcomes and evidence. At the same time, investors must continue to fulfil their core fiduciary duty of delivering appropriate long-term risk-adjusted returns.
A lot of institutional investors already have broad portfolio decarbonisation targets and are monitoring (modelled) annual emissions for most sectors and asset classes versus a declining glidepath to 2030 or 2050. But objectives are moving beyond portfolio decarbonisation alone. Biodiversity, nature-related risks, adaptation, resilience and the role of real assets in generating real, on-the-ground, impact are all becoming more important discussion points in supporting the transition to a more sustainable economy. Investors increasingly seek to understand not only how portfolios affect the real world, but also how changes in the real world may affect portfolio resilience over time.
Sustainability risk integration is not about producing more awareness or sustainability reporting. It is about creating information to support decision-making with the right data, tooling and processes, which investors and boards can use in practice. This requires forward-looking insights into climate and broader sustainability vulnerabilities, transition pathways, nature-related dependencies and portfolio resilience, while recognising inherent uncertainty.
Organisations are at different stages of their sustainability risk integration journey. As a result, implementation can differ across asset classes, sectors and geographies and individual investments, reflecting differences in data availability, risk characteristics and analytical maturity. The type of information required may also differ by use case: portfolio managers require issuer-level insights, while boards and risk committees focus on total portfolio-level resilience and risk concentrations. Organisations must also decide whether to focus solely on climate risk or adopt a broader sustainability risk perspective. Choices around governance, public versus vendor data sourcing, analytical tools and the extent to which external managers are relied upon shape how sustainability risks are integrated into investment and risk management processes.
In practice, investors should start by identifying the sustainability risks that can be material to portfolios, sectors, geographies and asset classes. The challenge then becomes translating those risks into decision-useful information. Depending on the organisation and use case, this may involve issuer-level risk diagnostics, a sectoral or asset class assessments. Boards should define the risk information needed to support strategic decisions and establish reporting that links sustainability risks to risk appetite, total portfolio resilience and long-term objectives. For organisations that are further along in their sustainability risk integration journey, the focus increasingly shifts towards enhancing the quality of underlying data, methodologies, governance and controls, and ensuring sustainability risk information remains relevant for investment and oversight decisions.
The second article of this series will focus on implementation. We explore how climate risk diagnostics and scenario-based analysis can be applied in practice through a stepwise framework despite different starting points across organisations, with different objectives and resources. A fixed income case study applies the framework to demonstrate how different physical climate risks can be assessed even in resource constrained organisations who are early on in their sustainability risk integration journey.
RiskSphere has been working with clients across the Dutch financial sector and governments and central banks in the Global South to help them tackle challenges related to understanding climate risk materiality and vulnerability, perform scenario analysis and stress tests, get the most out of ESG data, regulatory compliance, and set up robust governance and reporting.
At RiskSphere, we help asset owners and asset managers further integrate sustainability risk, and we want to further grow our footprint in the sector. Asset management has significant synergies with the work we do across the financial sector, and the required capabilities are remarkably similar: understand and translate sustainability risks into information that supports governance, investment decisions, risk management and regulatory compliance. Our consultants have backgrounds with Big Four firms, banking and institutional investors, and bring deep subject expertise, strong stakeholder management, adaptiveness and independent thinking.
We help asset owners and asset managers with designing and implementing sustainability risk solutions and with independent validation of existing assumptions, processes and products (external manager or vendor imposed). We structure our services along two pillars that align with the type of questions clients are having.
Sustainability diagnostics: materiality assessments, vulnerability scans, scenario analysis, pathways and risk analytics on asset, sector, and portfolio level.
Strategy and frameworks: sustainability, ESG and responsible investment frameworks, total portfolio targets and board-level reporting and dashboards.