Real Estate Financialisation and Nature Related Risks

By Trude Myklebust and Elisabetta Colombo

Abstract: This article investigates the intersection between climate- and nature-related risks and real estate financialisation, highlighting the legal and economic implications of this convergence for financial regulation, investor protection, and the safeguarding of fundamental rights.

It begins by questioning the sufficiency of disclosure-based frameworks as the primary regulatory tool for addressing systemic environmental risks. While disclosure enhances transparency, behavioural limits and structural externalities suggest that mandatory reporting alone is insufficient to steer long-term investment strategies towards sustainability. This calls for complementary regulatory instruments such as prudential requirements, carbon-adjusted capital rules, and binding eco-compatibility standards.

Considering the implications of real estate financialisation, the article concludes that reconciling real estate financialisation with ecological sustainability requires an integrated regulatory model that combines transparency with substantive obligations, balances allocative efficiency with distributive justice, and embeds sustainability within the constitutional framework of financial regulation.

Summary: 1. Introduction. – 2. Climate- and nature-related risks in the context of financial regulation. – 3. Climate-related risks as new regulatory frontiers for the financialisation of real estate. – 4. The current regulatory path: from voluntary disclosure to binding regulation. – 5. Dynamics of real estate financialisation between allocative efficiency and legal constraints. – 6. Climate- and nature-related risks in the regulated real estate markets: physical, transition and litigation risks. – 7. Real estate loans and the role of lenders in the mitigation of the climate- and nature-related risks. – 8. Towards an integrated regulatory model: investor protection, financial stability and sustainability.

1. Several questions arise about the intersection between climate- or nature-related risks and real estate financialisation.[1] Under a regulatory perspective, these questions converge towards the need to reconcile the current wave of financialisation and the development of real estate industry, on one side, with the protection of common goods in terms of environment and individual rights as housing, on the other.

At first sight, it is generally agreed that lenders can be called to reduce their exposure towards the risks of climate change and pollution, as well as investors can be increasingly informed about the social impact of their capital allocation. However, it is worth considering the extent to which the financialisation of real estate can be reconciled with climate stability, biodiversity preservation, and any social individual right related to housing. All the above is remarked considering also the willingness to pursue economic progress and growth.

It is generally agreed that regulatory intervention, if properly designed, can align private incentives with public goals by internalising negative externalities and redistributing risks. Hence, this is one of the founding assumptions of this research, even if this reconciliation may require moving beyond disclosure-centric frameworks towards more direct legal instruments, such as prudential rules, carbon-adjusted capital requirements, and binding standards for eco-compatibility.

All the above comes from a critique analysis of the sufficiency of disclosure-based regulation.[2] Actually, we feel the need to question the hypothesis that mandatory disclosure is sufficient to steer investment decisions in ways that reduce systemic exposure to climate risks. Our approach moves from a doubt about the underlying assumption of disclosure regimes: i.e. market agents, once adequately informed, will simply adjust their strategies accordingly, not necessarily impacting their company’s awareness, which would have positive consequences also in the future[3]. This suggests the opportunity to investigate the possibility that disclosure, while necessary, is insufficient as a primary regulatory tool, in particular, if a long-term perspective is considered.

Actually, we are dealing with matters that are related to fundamental rights of the current and forthcoming generations. This calls us to consider the role of fundamental rights in shaping sustainable financial regulation. Indeed, whether these related risks undermine not only financial stability but also the protection and intergenerational equity, then their regulation must be framed as a constitutional imperative. Therefore, this suggests hypnotizing that future generations can be considered (at least) as stakeholders, and this will strengthen the legitimacy and durability of a regulatory framework aimed at mitigating climate- and nature-related risks while pursuing the maximization of progress and social welfare.

All the above leads us to consider the comparative effectiveness of different regulatory models. The European Union’s integrated approach, Norway’s reliance on ethical investment strategies, and the more fragmented U.S. framework reflect distinct institutional settings and policy traditions. Hence, it is worth verifying whether the EU model for systemic coherence will result in hybrid solutions combining disclosure, prudential tools, and substantive rights protection may ultimately prove more resilient and transferable across jurisdictions.

2. The emergence of climate- and nature-related risks has progressively reshaped the conceptual and regulatory landscape of financial markets. Initially framed within voluntary agendas of sustainable finance and responsible investment – such as the UN Principles for Responsible Investment (PRI) launched in 2006 – these risks were understood primarily through the lens of disclosure and market transparency. The underlying rationale was that investors, when provided with adequate information, would incorporate environmental risks into their decision-making, thereby promoting an efficient allocation of capital towards sustainable activities. Yet, as the Norwegian Climate Risk Committee (NOU 2018:17) and Nature Risk Committee (NOU 2024:2) underscored, voluntary disclosure created space for greenwashing and free riding, revealing the structural limitations of self-regulation in addressing systemic environmental threats.

A pivotal turning point was marked by the Stern Review[4], which defined climate change as “the greatest market failure,” thus positioning ecological degradation as a problem inseparable from financial stability. This narrative was further reinforced by Christine Lagarde’s 2013 intervention at the IMF, and most notably by Mark Carney’s Lloyd’s speech on the “Tragedy of the Horizon” which articulated how short-term market horizons fail to capture long-term climate risks[5]. Parallelly, the 2021 Dasgupta Review highlighted the economic consequences of biodiversity loss, thereby extending the debate from climate to nature-related risks[6]. These intellectual milestones legitimised the incorporation of environmental disclosure within the architecture of financial regulation, leading to the establishment of frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) by the Group of 20 (G20) and the Financial Stability Board (FSB) in 2015 and the Taskforce on Nature-related Financial Disclosures (TNFD) in 2021.

From a legal perspective, these frameworks revolve around the disclosure of risks and opportunities arising from climate change or nature loss, requiring reporting on governance, strategy, goals, and risk management. Three main categories of risk have been identified: physical risks, linked to environmental shocks; transition risks, associated with policy, regulatory, and technological change; and litigation risks, encompassing the growing body of climate-related lawsuits. Each of these categories causes complex legal implications, spanning tort law, corporate law, and financial market regulation. Litigation risks, in particular, illustrate the dynamic reinterpretation of legal standards such as negligence and reasonableness, evidencing how courts and regulators adapt traditional legal concepts to systemic ecological challenges.

Ultimately, the incorporation of climate- and nature-related risks into financial regulation reflects a paradigmatic shift in the role of law. While disclosure-based approaches serve as indirect instruments aimed at behavioural change, they also risk delaying more direct regulatory interventions in fields such as corporate governance, financial stability and property law. The challenge for legal research in this field lies in critically assessing whether disclosure alone can deliver substantive change, or whether the pursuit of sustainability in financial markets demands more prescriptive and structural regulatory strategies.

3. The financialisation of real estate has increasingly attracted the attention of both scholars and policymakers over the past two decades. No longer confined to its traditional role as a store of value or a factor of production, real estate has progressively evolved into a global financial asset class, subject to the same logics of capital flows, securitisation, and risk management that characterise other segments of the financial markets. This transformation has profound implications for the allocation of resources, the distribution of wealth, and the resilience of financial systems in the face of systemic shocks. At the same time, the advent of climate- and nature-related risks as salient policy concerns has introduced an additional layer of complexity, challenging the capacity of legal and regulatory frameworks to safeguard both financial stability and the public interest.

The recognition of climate change as the “greatest market failure ever seen” in the Stern Review (2006)[7] marked a decisive turning point in this debate, highlighting the inadequacy of market mechanisms to internalise environmental costs. Subsequent interventions, such as Mark Carney’s seminal “Tragedy of the Horizon” speech, reinforced the view that climate-related risks were not merely externalities to be addressed by environmental policy, but core threats to financial stability requiring the attention of central banks, supervisors, and lawmakers.[8] In parallel, the 2021 Dasgupta Review extended this reasoning to biodiversity, exposing the structural risks linked to the erosion of natural capital.[9] These milestones paved the way for a redefinition of the relationship between finance, real estate, and sustainability, whereby systemic risks of environmental origin are treated as integral to financial regulation.
The European Union has been at the forefront of this regulatory evolution, integrating climate and sustainability considerations into its financial legislation, most notably through the Sustainable Finance Disclosure Regulation (SFDR)[10], the Corporate Sustainability Reporting Directive (CSRD)[11], and the Taxonomy Regulation[12]. Such initiatives reflect a broader strategy to mobilise private capital in support of the green transition, recognising that the scale of required investments far exceeds public resources. Yet they also raise fundamental questions about the adequacy of disclosure-based approaches, the potential for regulatory arbitrage, and the distributive consequences of financialising assets that are intrinsically tied to social needs, such as housing.

This article sets out to investigate the nexus between real estate financialisation and climate-related risks through a legal and economic lens. It argues that the convergence of these dynamics requires a reconsideration of traditional categories of financial regulation and property law, as well as a more nuanced understanding of their implications for equity, efficiency, and social welfare. By situating the discussion within both the European context and comparative jurisdictions such as Norway and the United States, the analysis aims to shed light on how law can mediate between market logics and the protection of common goods, ultimately contributing to the debate on the future of financial regulation in an era of ecological constraints.

4. The regulation of climate- and nature-related risks has followed a trajectory that is emblematic of the broader evolution of sustainable finance: from soft-law initiatives grounded in voluntary commitments to binding regulatory frameworks embedded in financial market legislation. This progression reflects not only the growing recognition of environmental risks as systemic in nature, but also the limitations of market self-regulation in addressing challenges marked by collective action problems, negative externalities, and intergenerational consequences.

The first phase of this evolution was characterised by voluntary frameworks, such as the United Nations Principles for Responsible Investment (PRI)[13], the Task Force on Climate-related Financial Disclosures (TCFD)[14] and, more recently, the Taskforce on Nature-related Financial Disclosures (TNFD)[15]. These initiatives shared the aim of enhancing transparency and providing investors with decision-useful information regarding climate- and nature-related risks. By focusing on disclosure, they sought to align capital allocation with sustainability objectives through market discipline rather than prescriptive regulation.

Reliance on voluntary participation and self-reporting caused them to be vulnerable to problems of credibility, greenwashing, and free riding, thereby limiting their effectiveness in achieving systemic change. The European Union has subsequently taken decisive steps to transform these voluntary standards into mandatory legal obligations. Central to this development are the Sustainable Finance Disclosure Regulation, the Taxonomy Regulation, and the Corporate Sustainability Reporting Directive. Together, these instruments establish a comprehensive framework that compels financial institutions and corporations to integrate sustainability considerations into their governance, strategy, and risk management, and to disclose them in a standardised and comparable manner. Unlike the voluntary schemes, which primarily targeted institutional investors, EU legislation imposes legally enforceable duties on a broad spectrum of financial and non-financial actors, thereby embedding sustainability within the legal fabric of the internal market.

Actually, supervisory authorities have played a pivotal role in consolidating this trajectory. At the European level, the European Securities and Markets Authority (ESMA)[16], the European Banking Authority (EBA)[17] and the European Insurance and Occupational Pensions Authority (EIOPA)[18] have issued guidelines and supervisory statements clarifying how firms are expected to comply with sustainability disclosure and risk management requirements. The European Systemic Risk Board (ESRB) has also emphasised the macroprudential dimension of climate-related risks[19], urging regulators to consider the potential for systemic disruptions arising from abrupt transitions or extreme weather events. Internationally, the Financial Stability Board has coordinated efforts to promote convergence, recognising that fragmented approaches could undermine both financial stability and investor protection.

This shift from voluntary disclosure to binding regulation reflects a fundamental rebalancing of the relationship between private autonomy and public oversight in financial markets. By imposing mandatory sustainability disclosures, EU law acknowledges that environmental risks are not peripheral to financial stability but core elements of systemic risk. At the same time, the institutional trajectory highlights the persistence of a disclosure-centric approach, which, while enhancing transparency, may still fall short of directly correcting market failures or ensuring socially optimal outcomes. This tension sets the stage for a deeper analysis of how financialisation in the real estate sector interacts with climate-related risks, and whether the existing regulatory paradigm is sufficient to address the challenges ahead.

5. The transformation of real estate into a financial asset class constitutes one of the defining features of contemporary capitalism. Whereas property ownership once primarily fulfilled social and productive functions – providing residential housing, enabling community life, and supporting economic activity – real estate has increasingly become subject to the logic of capital exploitation and global financial flows. This process of financialisation is evident in the proliferation of real estate investment trusts (REITs), securitised mortgage products, and large-scale institutional investment in housing markets, which have redefined the role of property from a social good into a vehicle for financial returns. From the perspective of allocative efficiency, financialisation has arguably brought certain benefits. By transforming illiquid assets into tradable securities, financial markets have facilitated access to capital, enabling the development of housing and infrastructure projects at scales previously unattainable. Moreover, the entry of institutional investors has introduced sophisticated risk management techniques and broadened the investor base, potentially contributing to financial stability and economic growth. Such dynamics resonate with the classical economic rationale whereby market mechanisms, if sufficiently transparent and competitive, allocate resources to their most productive uses.

Although this paper is the result of a joint reflection of the authors, Trude Myklebust wrote the paragraphs 1-3 and Elisabetta Colombo wrote the paragraphs 4-8

These efficiency gains are counterbalanced by significant negative externalities and distributive consequences. The influx of speculative capital into real estate markets has been linked to sharp increases in property prices, reducing affordability and exacerbating social inequality. In metropolitan areas across Europe and North America, the dominance of financial actors has often crowded out local households, transforming housing from a basic social need into an investment commodity. The 2008 global financial crisis demonstrated the systemic risks inherent in this transformation, as the collapse of mortgage-backed securities triggered a cascade of defaults and a worldwide recession.

Climate- and nature-related risks further complicate this picture. Real estate assets are uniquely exposed to physical risks, such as flooding, extreme heat, and sea-level rise, which can cause sudden devaluations of entire property portfolios. At the same time, transition risks – arising from regulatory changes, shifts in market preferences, and the decarbonisation agenda – may render certain real estate investments stranded. These vulnerabilities are amplified by the financialisation process: securitisation spreads various risks across global markets, increasing opacity and then complicating systemic risk assessment. In effect, the financialisation of real estate magnifies the channels through which climate-related risks can propagate throughout the financial system.

From a law-and-economics perspective, the key question is whether the social costs of these externalities outweigh the allocative efficiencies generated by financialisation. Negative externalities manifest not only in market instability and price volatility, but also in the erosion of fundamental rights, such as the right to housing and the right to savings. The legal system thus faces the dual challenge of safeguarding financial stability while ensuring distributive justice and intergenerational equality. These concerns highlight the limits of purely market-based solutions and call for regulatory interventions that balance efficiency with social welfare maximisation.

Ultimately, the financialisation of real estate cannot be viewed in isolation from broader ecological and social dynamics. By embedding property within global financial circuits, financialisation has increased the sector’s vulnerability to systemic shocks, including those triggered by climate and biodiversity loss. The legal response must therefore address not only the mechanics of disclosure and risk management, but also the deeper structural question of how to reconcile the treatment of real estate as both a financial asset and a fundamental component of social welfare.

6. The integration of climate- and nature-related risks into the real estate sector requires a systematic categorisation of the channels through which such risks materialise. Building on the frameworks developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD), three principal categories may be distinguished: physical risks, transition risks, and litigation risks. Each category interacts with the financialisation of real estate in ways that amplify systemic vulnerabilities and raise complex regulatory challenges.

Physical risks are perhaps the most immediate and visible. Rising sea levels, increasing frequency of floods, heatwaves, and extreme weather events directly threaten the value, insurability, and usability of real estate assets. Properties located in coastal areas, floodplains, or zones exposed to wildfire are particularly at risk of becoming stranded assets, with sudden drops in value and long-term impairment of rental income. These risks have direct implications for mortgage markets, securitised real estate products and institutional portfolios, potentially triggering chain reactions across the financial system[20]. The distributive dimension is equally significant: low-income households are often disproportionately exposed to climate hazards, raising questions of equity and social justice.

Transition risks emerge from regulatory and policy changes, technological innovation, and shifts in consumer preferences linked to the green transition. The European Union’s climate neutrality objectives, enshrined in the European Climate Law (Regulation (EU) 2021/1119), and related initiatives such as the Energy Performance of Buildings Directive (EPBD)[21] impose progressively stringent requirements on the energy efficiency of buildings. Real estate assets that fail to comply risk rapid depreciation, diminished liquidity, or outright obsolescence. Financial actors face the challenge of repricing entire portfolios in light of these transition dynamics, while regulators must anticipate potential systemic effects stemming from a disorderly transition. The principle of proportionality in regulation, widely debated in EU law, becomes particularly salient in ensuring that transition policies balance environmental imperatives with financial stability.

Litigation risks represent a more diffuse but increasingly significant category. Climate litigation has expanded globally, encompassing claims against governments, corporations, and financial institutions for failing to mitigate or disclose climate risks. In the real estate sector, litigation risks may arise from negligence in construction standards, misrepresentation of environmental risks in property transactions, or breach of fiduciary duties by asset managers. Courts have gradually adapted traditional legal concepts – such as “negligence”, “duty of care”, and “reasonable expectations” – to the evolving climate context, thereby creating new sources of liability and uncertainty. For financial institutions, the prospect of liability extends to disclosure obligations, raising the stakes of compliance with SFDR and CSRD requirements.

From a law-and-economics perspective, these categories of risk exemplify the limits of individual decision-making in the face of systemic and intergenerational challenges. Physical risks embody externalities that markets fail to internalise; transition risks highlight the problem of regulatory timing and policy credibility; and litigation risks reveal the role of courts as ex-post correctives to market failures. Yet reliance on litigation and disclosure alone risks producing fragmented and reactive outcomes, rather than comprehensive governance solutions. For real estate financialisation, this implies that legal frameworks must go beyond transparency to incorporate proactive mechanisms of risk allocation, investor protection, and systemic resilience.

In sum, climate- and nature-related risks in the real estate sector are not marginal externalities but core determinants of asset value and financial stability. Their interaction with financialisation amplifies vulnerabilities, challenging regulators, investors, and courts alike to redefine the balance between private autonomy, public oversight, and the protection of common goods.

7. The pivotal role of lenders in shaping the sustainability trajectory of the real estate sector has become increasingly evident in both policy discourse and regulatory practice. Real estate loans represent a critical channel through which climate- and nature-related risks are transmitted to the financial system, given the scale of mortgage markets and their centrality in banking balance sheets. The allocation of credit, its pricing, and the contractual conditions imposed by lenders not only determine the resilience of real estate assets to environmental shocks, but also influence broader societal outcomes, such as housing affordability and the pace of the green transition.

From a prudential standpoint, supervisory authorities have underscored the need for banks to integrate climate-related risks into their credit risk assessments and capital allocation processes. The European Central Bank (ECB)[22] has required significant institutions to embed climate and environmental considerations into governance, risk management, and internal capital adequacy assessments, while the European Banking Authority (EBA) has issued guidelines on loan origination and monitoring that explicitly refer to energy efficiency and environmental sustainability[23]. These interventions signal a paradigm shift: lenders are no longer neutral intermediaries, but active participants in steering capital flows towards sustainable assets. In this sense, credit conditions become a regulatory lever for internalising negative externalities, complementing disclosure obligations with substantive behavioural change.

From the perspective of allocative efficiency, the preferential treatment of green loans and the penalisation of environmentally harmful assets can enhance the capacity of financial markets to channel resources towards investments aligned with the EU’s climate neutrality objectives. Yet efficiency gains must be balanced against equity concerns, particularly in mortgage markets, where the costs of transition may disproportionately burden vulnerable households. For instance, stricter lending criteria linked to building energy performance may reduce access to credit for owners of older or inefficient properties, raising distributive justice issues and potentially exacerbating social inequalities.

The law-and-economics analysis thus highlights the tension between maximising social welfare and safeguarding financial stability. If lenders exercise their gatekeeping role without adequate regulatory guidance, market dynamics may favour short-term profitability over long-term ecological resilience. Conversely, prudential regulation, when properly calibrated, can align incentives by reducing systemic exposure to stranded assets and promoting intergenerational equity. A comparative perspective reinforces this insight: Norway’s financial institutions, supported by state policy frameworks, have been proactive in integrating environmental risks into mortgage lending, whereas in the United States regulatory fragmentation has produced uneven outcomes, reflecting the political economy of climate regulation.

In conclusion, lenders occupy a central position in the governance of climate- and nature-related risks within real estate markets. Their role transcends traditional risk intermediation and extends into the realm of public policy, where credit allocation becomes a tool for ecological transition. The legal challenge lies in designing a regulatory architecture that empowers lenders to mitigate systemic risks while ensuring that the costs of transition are distributed fairly, thereby reconciling efficiency, equity, and sustainability within the framework of real estate finance.

8. The convergence of real estate financialisation with climate- and nature-related risks necessitates a rethinking of the regulatory paradigm. The challenge is not merely to refine disclosure requirements, but to develop a holistic framework that reconciles the competing demands of investor protection, financial stability, and sustainability. Such an integrated approach recognises that real estate occupies dual status: it is simultaneously a cornerstone of social welfare and a tradable financial asset, rendering purely market-based solutions inadequate.

From the standpoint of investor protection, the implications are profound. Real estate represents one of the most significant repositories of household savings, particularly within the European Union, where property ownership is often the primary form of wealth accumulation. The principle of safeguarding savings, enshrined in both EU and national constitutions, imposes a positive duty on regulators to ensure that financialised real estate markets do not expose retail investors to disproportionate risks. Yet the opacity and complexity introduced by securitisation and cross-border investment vehicles raise questions as to whether existing legal safeguards are sufficient. An integrated framework must therefore enhance transparency while also strengthening substantive protection, including liability regimes for misrepresentation and fiduciary breaches.

Financial stability provides the second cornerstone of this model. The global financial crisis of 2008 demonstrated how vulnerabilities in the real estate sector can cascade through securitised instruments into the wider financial system. Climate- and nature-related risks magnify these vulnerabilities by introducing new channels of correlation and contagion. Stress tests conducted by the European Central Bank[24] and the European Banking Authority[25] increasingly incorporate climate scenarios, yet their methodological limitations underscore the difficulty of capturing the systemic nature of ecological risks. A forward-looking regulatory approach must therefore embrace macroprudential instruments capable of addressing concentration risks, stranded assets, and the interdependence between real estate and banking sector exposures.

The third dimension is sustainability, which extends beyond financial metrics to equity, distributive justice, and the protection of common goods. The European Green Deal explicitly links financial regulation to environmental objectives, yet the dominant reliance on disclosure mechanisms risks privileging transparency over substantive change. Law-and-economics analysis suggests that disclosure alone cannot internalise the externalities associated with climate risks; rather, it must be complemented by corrective instruments such as carbon pricing, prudential requirements, and direct regulation of construction and energy standards. The aim is to align market incentives with social welfare maximisation, ensuring that the green transition does not exacerbate inequalities or undermine the right to housing.

A comparative perspective offers further insights. Norway, with its sovereign wealth fund and tradition of integrating ethical considerations into investment decisions, provides an example of how public policy can shape capital allocation towards sustainability without undermining financial performance. In the United States, by contrast, the more fragmented regulatory landscape has generated tensions between federal initiatives[26] and state-level opposition, illustrating the political economy constraints of integrating climate risks into financial regulation. These divergences underscore the importance of institutional coherence and policy credibility in designing effective regulatory frameworks.

In conclusion, an integrated regulatory model must operate on multiple levels: enhancing investor protection through substantive legal duties; safeguarding financial stability via macroprudential tools; and embedding sustainability within property and financial law. Only by bridging these dimensions can regulators reconcile the dual nature of real estate, balancing its financialised role in global markets with its fundamental function as a pillar of social welfare and a critical determinant of ecological resilience.

***

Trude Myklebust is Postdoctoral Fellow at Department of Public and International Law, University of Oslo

Elisabetta Colombo is lawyer and graduated at Università degli Studi di Milano, winning the Prize in memory of Carlo d’Urso for alumni who e excelled in academic, professional and cultural areas.

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[1] Actually, the question raised by this paper follows the reading of K. Kedward, J. Ryan-Collins and H. Chenet, Managing Nature-Related Financial Risks: A Precautionary Policy Approach for Central Banks and Financial Supervisors, 18 August 2020. Indeed, the authors argue that nature-related financial risks encompass not only climate change but also biodiversity loss, water scarcity, ocean acidification, chemical pollution and zoonotic diseases. In this view, these risks are systemic, endogenous, and subject to radical uncertainty. These features undermine approaches relying solely on risk disclosure and quantification. As a result, they conclude for a precautionary policy approach, including qualitative methods of risk management and the active exclusion of clearly unsustainable activities (such as deforestation) from bank financing through micro- and macro-prudential tools, and this conclusion recalls the need for a proper analysis under a law and economics approach.

[2] See T. Schimanski, C. Colesanti Senni, G. Gostlow, J. Ni, T. Yu, M. Leippold, Exploring Nature: Datasets and Models for Analyzing Nature-Related Disclosures, Swiss Finance Institute Research Paper No. 24-95, 27 January 2024, as the authors develop expert-annotated datasets and classifier models – grounded in the Taskforce on Nature-related Financial Disclosures (TNFD) guidelines – to detect and analyze corporate communication on nature-related risks (including water, forest, and biodiversity). This effort underscores that disclosure alone, even when methodologically sophisticated, remains a descriptive instrument and may not suffice to align firm strategies with systemic nature-related challenges.

[3] The reference to behavioural economics studies is grounded in the hypothesis that judgment (or, more precisely, the calculation by which individuals estimate probabilities), preferences (that is, the motivations underlying behaviours), and choices (recte: the processes through which an action is selected) may find application in the analysis of market actors’ conduct with regard to their exposure to natural or climate-related risks.

In this respect, it is worth recalling an analysis that shows how behavioural economics challenges the neoclassical assumption of full rationality and, accordingly, the linear connection between the availability of information and strategic decision-making. Indeed, cognitive limits and recurrent “behavioural failures” reveal that information, as such, does not automatically translate into enhanced awareness nor into choices capable of producing sustainable long-term effects for the company. See D. Kanev – V. Terziev, Behavioural Economics: Development, Condition and Perspectives, in Business Economics, 2018, pp. 387 ff.,

[4] The Economics of Climate Change: The Stern Review released on 30 October 2006 by Her Majesty’s Treasury of the UK Government and published in 2007 by Cambridge University Press. For a 10-year comparison, please refer to Economic development, climate and values: making policy by Nicholas Stern – who led, as Head of the UK Government Economic Service, the Stern Review – published on 7 August 2015, in “Proceedings of the Royal Society B”, Volume 282, Issue 1812.

[5] Transcript of the speech given by Mark Carney, Governor of the Bank of England, Chairman of the Financial Stability Board, at Lloyd’s of London on 29 September 2015 can be found at https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.pdf.

[6] The full report of Economics of Biodiversity: The Dasgupta Review led by Professor Sir Partha Dasgupta (Frank Ramsey Professor Emeritus, University of Cambridge) can be downloaded at https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review.

[7] See Nicholas Stern, The Economics of Climate Change: The Stern Review, HM Treasury, London, 2006, where climate change was famously defined as “the greatest and widest-ranging market failure ever seen.” It is worth considering that the Review provided a comprehensive assessment of the economic costs of inaction versus mitigation, estimating that the damages from unmitigated climate change could reach at least 5% of global GDP annually, while taking early action would cost around 1% of global GDP. Indeed, this framing decisively shifted the debate by underscoring the inadequacy of market mechanisms to internalise environmental externalities and by legitimising strong policy intervention. For subsequent academic analyses, see J. Stiglitz, A New Paradigm for Climate Economics, in Journal of Economic Perspectives, vol. 32, no. 4, 2018, pp. 3–20; and H. Helm, Climate Change Policy: The Stern Review and its Critics, in British Journal of Environment & Climate Change, vol. 2, no. 4, 2012, pp. 403–420.

[8] See Mark Carney, Breaking the Tragedy of the Horizon – Climate Change and Financial Stability, Speech at Lloyd’s of London, 29 September 2015, available at: http://www.BankofEngland.co.uk, where he identified physical, liability, and transition risks and stressed the structural misalignment between long-term climate threats and short-term market horizons. His intervention laid the ground for the Task Force on Climate-related Financial Disclosures (TCFD), established by the FSB in 2015 (FSB, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, 2017), and has been widely recognised in the literature as a turning point in framing climate change as a systemic financial risk. See also D. Schoenmaker & W. Schramade, Principles of Sustainable Finance, OUP, 2019, pp. 45–60; R. van Tilburg & D. Schoenmaker, Climate Change and Financial Stability: A Risk Perspective, Ecological Economics, vol. 183, 2021, art. 106957.

[9] This formulation is grounded first in The Economics of Biodiversity: The Dasgupta Review (2021), produced by HM Treasury and led by Sir Partha Dasgupta. Indeed, the Review fundamentally reframes the economic exercise by embedding humanity within Nature, asserting that by neglecting “natural capital” and giving primacy to produced and human capital, our traditional models deplete vital ecosystem services and obscure the true costs of ecological degradation. It advocates measuring national prosperity through “inclusive wealth” that aggregates natural, human, and produced capital, and challenges the sufficiency of GDP as a metric of progress.

[10] Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector aimed at contributing to the EU’s goal to attract private funding to make the shift to a net-zero economy.

[11] Directive (EU) 2022/2464 of the European Parliament and of the Counsil of 14 December 2022 amending Regulation (EU) 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, is part of the European Green Deal.

[12] Such regulation – entered into force on 12 July 2020 – falls within the context of the European Green Deal, targeting the 2030-goals.

[13] The PRI is a collaborative organisation aimed at promoting responsible investment. Such Principles have been launched by investors in 2006 and are open to any new signatory in order to develop a more sustainable global financial system, starting from the stakeholders’ commitment in such regard. According to the PRI Strategy 2024-2027, the responsible investment community of PRI covers more 50% of managed capital globally and the target is to grow the signatory base by a further US$10-20tn in asset under management.

[14] TCFD has been established in 2015 and disbanded in 2023 on the Financial Stability Board’s assumption that its tasks have been completed. The achievement of such goal may be argued, also considering that FSB asked the IFRS Foundation to take over the monitor of the progress on the disclosure activities carried out by companies in the context of TCFD.

[15] From 2021 such global initiative focuses on nature, showing how the relevant externality should be managed in the business and finance fields throughout four pillars (governance, strategy, risk and impact management, metrics and targets), adopting the LEAP approach (Locate, Evaluate, Assess, Prepare).

[16] Lastly, ESMA published the Guidelines on Enforcement of Sustainability Information supporting the supervision of listed issuers’ sustainability information under the European Sustainability Reporting Standards (ESRS) and Taxonomy Regulation.

[17] Among the extensive activities of the EBA in such regard, it is of particular interest the “Report on greenwashing monitor and supervision” (EBA/REP/2024/09) which, inter alia, depicts the greenwashing trends, types and financial risks, including the sustainability-linked loans.

[18] Recently EIOPA analysed the level of investment sustainability of insurers based in the European Economic Area, considering only equity and corporate bonds that together weight around 39% of their total investment: 4.5% of such investment are aligned with the Taxonomy according to the factsheet 2024 Q2.

[19] As far as accounting is concerned, for example, ESRB published in April 2024 the report on Climate-related risks and accounting.

[20] In the context of the UN environment programme, in May 2024 TCFD published the report on Managing physical climate-related risks in loan portfolios mainly addressed to retail banks in order to adopt the measures which are necessary to cope with the upcoming climate challenges which will affect the economic and financial market.

[21] Directive (EU) 2024/1275 of the European Parliament and of the Council of 24 April 2024 on the energy performance of buildings aims to achieve the full decarbonized building stock within 2050. The mentioned directive will be implemented at national level by the end of May 2026.

[22] In 2022, the ECB performed a climate risk stress test and a thematic review on climate-related and environmental risks in the banking market, highlighting the need for certain banks to update their procedures to manage the mentioned risks.

[23] EBA final report on Guidelines on loan origination and monitoring published on 29 May 2020 (EBA/GL/2020/06). Moreover, please refer to section 5 (“Green loan origination and monitoring process”) of EBA Report in response to the call for advice from the European Commission on green loan and mortgages published in December 2023 (EBA/REP/2023/38).

[24] ECB – Banking Supervision, 2022 Climate Risk Stress Test – Results, 8 July 2022. The latter highlighted that about 60% of banks have not implemented climate stress testing frameworks and climate risks are not widely integrated in the relevant credit risk models.

[25] EBA, 2023 EU-wide stress test reports the results test of 70 banks from 16 EU and EEA countries, representing about 75% of EU banks’ total assets.

[26] For further details, please refer to Securities and Exchange Commission’s proposed rule that aimed at standardizing climate disclosures for public companies, followed by the relevant final rule in 2024.