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Nature in

Green Finance

Bridging the gap in environmental

reporting

August 2023

DISCLOSURE INSIGHT ACTION

Executive summary

Standards such as the Task Force on Climate-related Financial

Disclosures (TCFD) have paved the way for nature-related disclosures

such as the Kunming-Montreal Global Biodiversity Framework

(GBF) and the forthcoming Taskforce on Nature-related Financial

Disclosures (TNFD).

As nature-related disclosures are set to become a business norm,

this report assesses the readiness of financial institutions to build

on their climate reporting towards holistic climate and nature

disclosures. The report analyzes the current state of environmental

reporting by financial institutions with a focus on climate change,

forests and water security.

In 2022, 556 financial institutions disclosed environmental data

through CDP’s climate change questionnaire, a 67% increase since

2020. In reviewing the data disclosed by these financial institutions in

2022, we categorized the findings in accordance with the four base

pillars of the TCFD and TNFD: Governance, Risk and Opportunities,

Strategy and Implementation, and Metrics and Targets. The findings

underscore the urgent need for financial institutions to integrate

nature-related risks and opportunities into financial decision-making.

While climate change is now widely considered within financial

institutions’ strategies, disclosure and action on forests, water, and

broader nature-related issues lag significantly behind. However, several

trends indicate a gradual shift in financial institutions moving beyond

tackling climate change in isolation, to addressing nature in tandem.

One-fth of ecosystem services are at risk of

collapse. Recognizing nature-related risks and

opportunities has become critical, with over half of

the world’s total GDP highly dependent on nature and

its services. Climate change and the degradation of

nature are inextricably linked, and therefore must be

addressed in an integrated manner.

556

FIs

67%

disclosed

environmental

data through CDP’s

climate change

questionnaire in

2022, a

increase since

2020.

2CDP Financial Services Report 2023

Urgent action,

based on

a holistic

approach, is

needed to avoid

tipping points

and ecosystem

collapse, and to

reach net-zero

emissions by

2050.

The initial efforts of financial institutions to disclose their forests and

water-related impacts demonstrate the intent of the sector to act on

climate change in synchrony with nature. However, the persistent and

significant gap in actions to address climate and nature-related risks

and opportunities is concerning. Urgent action, based on a holistic

approach, is needed to avoid tipping points and ecosystem collapse,

and to reach net-zero emissions by 2050.

Financial institutions, regulatory bodies and standard setters play

vital roles in facilitating a system-wide transformation to address

these risks and opportunities together. The forthcoming disclosure

guidelines and recommendations from the TNFD, due for release

in September 2023, will significantly influence the future of nature-

related financial disclosures. Financial institutions making their first

cross-theme disclosures through CDP are positioning themselves to

implement recommendations, proactively manage nature-related risks

and capitalize on emerging opportunities.

3CDP Financial Services Report 2023

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NatureinGreenFinanceBridgingthegapinenvironmentalreportingAugust2023DISCLOSUREINSIGHTACTIONExecutivesummaryStandardssuchastheTaskForceonClimate-relatedFinancialDisclosures(TCFD)havepavedthewayfornature-relateddisclosuressuchastheKunming-MontrealGlobalBiodiversityFramework(GBF)andtheforthcomingTaskforceonNature-relatedFinancialDisclosures(TNFD).Asnature-relateddisclosuresaresettobecomeabusinessnorm,thisreportassessesthereadinessoffinancialinstitutionstobuildontheirclimatereportingtowardsholisticclimateandnaturedisclosures.Thereportanalyzesthecurrentstateofenvironmentalreportingbyfinancialinstitutionswithafocusonclimatechange,forestsandwatersecurity.In2022,556financialinstitutionsdisclosedenvironmentaldatathroughCDP’sclimatechangequestionnaire,a67%increasesince2020.Inreviewingthedatadisclosedbythesefinancialinstitutionsin2022,wecategorizedthefindingsinaccordancewiththefourbasepillarsoftheTCFDandTNFD:Governance,RiskandOpportunities,StrategyandImplementation,andMetricsandTargets.Thefindingsunderscoretheurgentneedforfinancialinstitutionstointegratenature-relatedrisksandopportunitiesintofinancialdecision-making.Whileclimatechangeisnowwidelyconsideredwithinfinancialinstitutions’strategies,disclosureandactiononforests,water,andbroadernature-relatedissueslagsignificantlybehind.However,severaltrendsindicateagradualshiftinfinancialinstitutionsmovingbeyondtacklingclimatechangeinisolation,toaddressingnatureintandem.One-fifthofecosystemservicesareatriskofcollapse.Recognizingnature-relatedrisksandopportunitieshasbecomecritical,withoverhalfoftheworld’stotalGDPhighlydependentonnatureanditsservices.Climatechangeandthedegradationofnatureareinextricablylinked,andthereforemustbeaddressedinanintegratedmanner.556FIs67%disclosedenvironmentaldatathroughCDP’sclimatechangequestionnairein2022,aincreasesince2020.2CDPFinancialServicesReport2023Urgentaction,basedonaholisticapproach,isneededtoavoidtippingpointsandecosystemcollapse,andtoreachnet-zeroemissionsby2050.Theinitialeffortsoffinancialinstitutionstodisclosetheirforestsandwater-relatedimpactsdemonstratetheintentofthesectortoactonclimatechangeinsynchronywithnature.However,thepersistentandsignificantgapinactionstoaddressclimateandnature-relatedrisksandopportunitiesisconcerning.Urgentaction,basedonaholisticapproach,isneededtoavoidtippingpointsandecosystemcollapse,andtoreachnet-zeroemissionsby2050.Financialinstitutions,regulatorybodiesandstandardsettersplayvitalrolesinfacilitatingasystem-widetransformationtoaddresstheserisksandopportunitiestogether.TheforthcomingdisclosureguidelinesandrecommendationsfromtheTNFD,dueforreleaseinSeptember2023,willsignificantlyinfluencethefutureofnature-relatedfinancialdisclosures.Financialinstitutionsmakingtheirfirstcross-themedisclosuresthroughCDParepositioningthemselvestoimplementrecommendations,proactivelymanagenature-relatedrisksandcapitalizeonemergingopportunities.3CDPFinancialServicesReport2023ContentsExecutivesummarySummary&keyfindingsIntroductionKeyfindingsCallstoactionSampleoverviewanddetailedfindingsdisclosingfinancialinstitutionsDetailedfindingsGovernanceRisks&opportunitiesStrategyandimplementationMetricsandtargetsMovingforwardHowCDPisdrivingprogressfornatureConclusion0205050812151717213242505052Summary&keyfindingsLimitingwarmingto1.5°Cisunachievablewithoutprotectingandrestoringnature.EncouragedbytheTaskForceonClimate-relatedFinancialDisclosures(TCFD)recommendations,voluntaryandmandatoryclimate-relateddisclosureshavenotonlybecomemainstream,butarealsohelpingtousherinnewframeworksforfinancialinstitutionsonnature-relateddisclosures.ThegrowingdesireandrecognitionoftheneedforaholisticapproachtobuildingaresilientandgreenfinancialsystemismostrecentlyevidentintheKunming-MontrealGlobalBiodiversityFramework(GBF).AnoutcomeofCOP15,theGBFcommitsgovernmentsworldwidetoprotect30%oftheplanet’slandandsea;cut,phaseout,andotherwisereformenvironmentallyharmfulsubsidies;andincreasefinanceflowsforprotectingandrestoringnature.Asthedefinitionofa‘green,resilient’financialsystemevolves,corporatedisclosuremustreflecttheinterconnectednessofallnature-relatedimpactsandcrises.WiththeWorldEconomicForumestimatingthatUS$44trillionofeconomicvaluegeneration-overhalfoftheworld’stotalGDP-ismoderatelyorhighlydependentonnatureanditsservices,nature-relatedrisksandopportunitiesaremateriallysignificantforFIs.Recognizingthis,theGlobalBiodiversityFramework’sTarget15commitsgovernmentstotakemeasurestoencourageandenablecompaniestoassessanddisclosetheirrisks,impacts,anddependenciesonnatureby2030.Further,theTaskforceonNature-relatedFinancialDisclosures(TNFD)ispreparingtorolloutrecommendationsakintotheTCFD,settingthestagefornature-relateddisclosurestobecomeabusinessnorm.TheTNFDbuildsonthesynergiesinframeworkdesignoftheTCFD,withtheirdraftdisclosurerecommendationsusingthefourpillarsofGovernance,Strategy,RiskManagement,andMetricsandTargetsoftheTCFDasabase.Therefore,westructureourfindingsofFIs’climateandnature-relateddisclosuresinthisreportaccordingtothesepillars,acknowledgingthatoncetheTNFDrecommendationsarefinal,theremaybesomechangesandadaptationstothisapproach.IntroductionIn2022,CDP’sportfolio-focused,TCFD-alignedquestionnaireforFIswasexpandedtocovernature-relatedissues.5CDPFinancialServicesReport2023CDPhashelpedFIsprepareforthisimminentshiftindisclosurestandardsandrequirements.In2022,ourportfolio-focused,TCFD-alignedquestionnaireforFIswasexpandedtocovernature-relatedissues,includingcommodity-drivendeforestation,watersecurity,andhigh-levelquestionsonbiodiversity,offeringFIsanopportunitytogetaheadofthecurve.ThisreportpresentsinsightsintotheinitialstateofenvironmentalreportingandactionbyFIs,basedondisclosuresbyFIsthroughCDP–thefirstyearthatFIshavebeenaskedtodiscloseontheseenvironmentalissuestogether.CDPfoundthatwhileaddressingclimatechangeiswidelyconsideredwithinbusinessstrategiesandtheassetallocationprocessofFIs,disclosingonforests,watersecurity,andbroadernature-relatedissueslagsconsiderablybehind.OneoftheprimaryreasonscitedfornotaddressingforestsorwatersecurityisthatFIsseetheseissuesasimportant,butnotanimmediatepriority.ManyFIsdonotyetrecognizethataddressingclimatechangeeffectivelynecessitatesconsiderationofnature-relatedissues.556FIsIn2022>260FIsdisclosedenvironmentalinformationthroughCDP'sclimatechangequestionnairedisclosedonallthreethemes275FIsdisclosedonwatersecurity272FIsdisclosedinformationonforests67%increasesincethesector-specificquestionnaire'sinceptionin202037%increasefrom2021Ofthese,forthefirsttime6CDPFinancialServicesReport2023ByfocusingonavarietyofTCFD-aligneddisclosureindicatorsforclimatechange,andparallelindicatorsforforestsandwatersecurity,asummaryofourfindingsisasfollows,presentedinaccordancewiththeTCFDfourbasepillars.Thereareseveraltrendsthatindicateaninitialshifttowardsaddressingnatureimpactsholistically:{Over270FIsvoluntarilydisclosedsomeinformationabouttheircurrentlevelofactiononforests,watersecurityandbiodiversity.{SomeleadingFIshavestartedtoimplementprocessestoaddressnature-relatedrisksandopportunitiesalongsideclimatechange.26-28%ofboardshavebusinessstrategiesorfinancialplanninginfluencedbynature-relatedrisksandopportunities.{ManymoreFIsareawareofthestrategicsignificanceofdoingso,signalingtheirintentiontoaddressnature-relatedrisksandopportunitieswithinthenexttwoyears.Boardoversightandassessmentsofnature-relatedriskexposuresriseto51%and45-47%,whenincludingthoseFIsthatintendtoaddresstheseissueswithinthenexttwoyears.{Acrossmanydisclosuremetrics,thecurrentlevelofactiononforestsandwaterisquitesimilar–wherethereiscompetenceandleadershipononeaspectofnature,thismaybeindicativeofactiononnaturemorebroadly.32%20%ofFIshaveboard-leveloversightofnature-relatedissues.ofFIsareassessingtheirexposurestonature-relatedrisks.7CDPFinancialServicesReport202312KeyfindingsOnlyasmallgroupofleadingFIscurrentlyhavethetop-downleadershiptooverseetheintegrationofclimateandnatureinfinancialdecision-makingprocesses.{91%ofFIsreportingtoCDPhaveboard-leveloversightofclimate-relatedissues,comparedto32%withoversightofforestsand/orwater-relatedissues.{EvenfewerFIshaveatleastoneboardmemberwithcompetenceonclimate(68%)and/ornature-relatedissues(24%),underscoringtheneedtoenhanceboard-levelcompetenceonenvironmentalissuesasawhole.{Board-leveloversightfocusessignificantlymoreontheimpactthatenvironmentalrisksandopportunitieshaveonFIs’financingactivities,thantheimpactsoftheirfinancingontheenvironment.{Whereclimate-relatedmanagementprocessesareinplace,thesemainlyreportdirectlytotheboardatregularintervals.Incontrast,themajorityofFIsthathavenature-relatedmanagementprocessesdonotreportdirectlytotheboardandarenoticeablyirregular-usuallyreporting“asimportantmattersarise”.Atpresent,mostFIsdonothavetheprocessesinplacetoadequatelyassessthesizeofnature-relatedrisksandopportunitiesthattheirportfoliosareexposedto.Critically,themajorityofthoseFIsthatarebeginningtoassesstheirportfolioexposureareidentifyingfinanciallymaterialrisksandopportunities.{85%ofFIsareassessingtheirportfolioexposurestoclimate-relatedrisksandopportunities,comparedto20%assessingtheirnature-relatedriskexposures.{Thesenumbersriseto95%assessingclimate-relatedrisks,47%forestsand45%watersecuritywhenincludingthenumberofFIsthatplantodosowithinthenexttwoyears.{Whilstasubsequent72%ofFIshaveidentifiedclimate-relatedrisksintheirportfoliowiththepotentialtohaveasubstantivefinancialorstrategicimpactontheirbusiness,10%and13%FIshavedonesoforforestsandwatersecurity–meaningthatoverhalfofthosethatareassessingtheirportfolioexposuresareidentifyingmaterialrisks.GovernanceRisksandopportunities8CDPFinancialServicesReport2023ArisingtideofFIsareidentifyinggreaterclimateandnature-relatedopportunitiesthanrisks–signalingthatthemomentumbehindgreenfinancingsolutionscouldbeavitalcatalystforFIstotakenatureseriously.{Acrossclimatechange,forests,andwatersecurity,moreFIshaveidentifiedmorefinanciallysubstantiveopportunitiesthanrisks.{FIsestimateonaveragethatthepotentialupsidefromopportunitiesis4.5xgreaterthanthepotentialdownsidestemmingfromriskstheyfacefromclimatechange,forests,andwater,withFIsdisclosingthattheyfindopportunitiesaggregatinguptoUS$5.35trillioninvalue,comparedtoreportedriskstotallinguptoUS$1.20trillion.{Over50%oftheidentifiedfinancialopportunitiesrelatedtoforestsandwateraredirectlytiedtothedevelopmentoffinancingproductsandsolutionsthatsupportsustainableforestriskcommoditysupplychains,watersecurity,orresilience.Examplesincludethefacilitationofgreenandsustainability-linkedbondsandloans,andbuildingresiliencethroughinnovativeandtailoredinsuranceproducts.Theseinitialevaluationsunderestimatethescaleofnature-relatedrisks,especiallywhencomparedwiththescaleofrisksrecognizedbyrealeconomycompanies.However,thisacknowledgmentofthefinancialmaterialityofnaturebyleadingFIsrepresentsapositivefirststepintheindustry,indicatingadesirefortools,guidance,andconsensusonassessingthenature-relatedrisksandopportunitiestheyface.3ClimatechangenowhasaninfluenceonbusinessstrategiesorfinancialplanningofnearlyallFIs(95%),andanincreasingminorityofFIs’strategiesarealsoinfluencedbybroadernature-relatedrisksandopportunities(26%and28%forforestsandwatersecurityrespectively).{Furthermore,mostFIsarecapitalizingonopportunitiestoprovideproductsandservicesthatenabletheirclientstomitigateclimatechange(81%).Incontrast,only23%and26%dosoforforestsandwatersecurity,highlightinganuntappedopportunitytosupportbusinessestohaltandreversenatureloss.StrategyandimplementationFIsdisclosedfindingclimateandnature-relatedopportunitiesaggregatinguptoUS$5.35trillion9CDPFinancialServicesReport2023ManyFIsundertakeclimate-relatedscenarioanalysistoeffectivelyassessthefinancialimpactsofclimatechangeonrisksandreturns.Despitethecomparativelackofmainstreamguidancetoincludenatureinscenariosanalysis,someleadingFIsarealreadyexpandingtheirclimate-relatedscenarioanalysisbyincorporatingforestandwater-relatedfactors.{65%ofFIsconductedclimate-relatedscenarioanalysisin2022,upfrom57%in2020,whilst7%and10%didsoforforestsandwatersecurityin2022respectively.Mostofthesenature-relatedscenarioanalysesarebeingconductedaspartofclimate-relatedscenarioanalysis,indicatingthatFIsaretakinganintegratedapproach.Thisispromising,asmarketleadersarealignedwiththeTNFD’sgoaltoworktowardsusingscenariosthatfullyintegrateconsiderationsofclimateandnature.Nature-relatedfinancingpoliciesandengagementstrategiesareyettobeestablishedandcomprehensivelyimplemented.{Forclimatechange,59%ofFIshaveapolicyframeworkwhichincludesclimate-relatedrequirementsthattheirclients/investeesneedtomeet.Forforestsandwatersecurity,thisdropsto26%and19%respectively,or46%and40%whenincludingFIsthatintendtointroducearelevantpolicyframeworkwithinthenexttwoyears.{Agrowingnumberofbanks(53%)arestartingtoincludeclimate-relatedcovenantsinsomeoftheirfinancingagreements.Anemerging23%ofbankshavestartedincludingforest-relatedcovenantsand21%havesomecovenantsrelatedtowatersecurity.Themajorityoftheirassociatedcreditandlendingpoliciesarefocusedonthedirectoperationsoftheirclients.4Disclosureofclimate-relatedportfolioimpactmetricshasbecomeincreasinglymainstream,inpartdrivenbyclearguidancefromthePartnershipforCarbonAccountingFinancials(PCAF).{66%ofFIsmeasuredtheirportfolioimpactsin2022,upfrom51%in2020.Similarly,219FIs(39%)disclosedafigurefortheirabsolutefinancedemissionsin2022,upfrom84FIs(25%)in2020.{79%ofFIsthataredisclosingfinancedemissionsthroughCDP(173of219FIs)referencedPCAFand/orPCAF’sGlobalGHGAccountingandReportingStandardfortheFinancialIndustryastheirchosenmethodologyforcalculatingfinancedemissions.Metricsandtargets53%23%21%ofbanksarestartingtoincludeclimate-relatedcovenantsinfinancingagreements.havestartedincludingforest-relatedcovenants,andhavesomecovenantsrelatedtowatersecurity.10CDPFinancialServicesReport2023Disclosureofnature-relatedportfolioimpactmetricsforFIsremainsnascentintheabsenceofclearguidanceontoolsandmethodologiestouse.10%ofFIscurrentlymeasuretheirportfolioimpactforforestsandwatersecurityand,encouragingly,anadditional30%plantodosowithinthenexttwoyears.{Presently,mostFIsarereportingdependencyandrisk-basedportfolioexposuremetricsonnatureinsteadofportfolioimpactmetrics.PlanneddevelopmentsbythePartnershipforBiodiversityAccountingFinancials(PBAF)andguidancefromtheTNFDwillbecriticaltosupportFIstoreporttheirportfolioimpactsonnature.{SomeleadingFIsareusingbespokemethodologies–forexample,calculatingtheirfinancedwaterwithdrawalfootprintsorassessingthetotallandundersustainablemanagement.Inotherinstances,regulationisdrivingthecalculationofwaterandbiodiversity-relatedimpacts,suchastheEUSFDRregulationtodiscloseagainstrelevantPrincipleAdverseImpactindicators.Financedemissions–thoseassociatedwithFIs’investmentsandlendingactivities–are750xlargerthanreportedoperationalemissionsonaverage,underscoringtheneedforFIstoprioritizedrivingreal-economyemissionsreductionsacrosstheirportfolios.Thisfigurevariessignificantlyacrossregions,from250xinEurope,to270xintheAsia-Pacificregion,to11,000xinNorthAmerica.{Thequalityoffinancedemissionsreportingisstillinitsinfancy–keysectorsandassetclassesareoftenexcludedfromcalculations,andthemethodologicalassumptionsandunderlyingdataqualityareseldomdisclosed.SettingmeaningfultargetsremainsaserioushurdleformanyFIs.Only29%(159FIs)havesetportfoliotargetsforclimatechange.Theremainingmajorityfocussolelyonreducingtheiroperationalemissions(46%,258FIs).Only11%(59FIs)ofthosesettingportfolioclimatetargetsarecommittedtoorhavesecuredvalidationfromtheScience-basedTargetsInitiative(SBTi).{Science-basedtargetsfornaturehavelaunchedforcorporates.FIsshouldencourageportfoliocompaniestoworktowardssettingNatureSBTs.{Tofurtherenablethedisclosureoftheirenvironmentaltargetsbeyondclimatechange,CDPhasintroducedaquestionin2023allowingFIstodisclosetargetsfordeforestation-freeand/orwater-securefinancing.11CDPFinancialServicesReport2023CallstoactionFinancialinstitutions(FIs)areacknowledgingtheimportanceofclimate-relatedconsiderationsandtheinterconnectednessofforestsandwatersecurityinoverallclimateresilience.However,thecurrentgapinactionsonaddressingclimateandnature-relatedrisksandopportunitiesmusturgentlybeaddressedinordertoachievethetargetofreachingnet-zeroemissionsby2050,whilstalsopreventingecosystemcollapse.CDPcallsonthefollowingactorstofacilitateasystem-widetransformationtoaddressthesetogether.12CDPFinancialServicesReport2023Calltoactionforfinancialinstitutions(assetmanagers,assetowners,insurersandbanks)Disclosedetailedportfolioimpactmetrics(inlinewiththePCAFStandardandemergingPBAFstandards).Integratenature-relatedconsiderationsintotheirstrategiesandfinancialplanningandestablishgovernanceprocessestooverseeenvironmentalissuesandimpactsholistically.PrepareforlikelymandatorydisclosurerequirementsbyimplementingtheforthcomingrecommendationsfromtheTNFD,includingsector-specificguidanceforFIsandcontinueusingCDP’squestionnairetocomprehensivelyreportacrossenvironmentalissues.Proactivelyidentifyandmanageportfolioexposuretonature-relatedrisksandopportunitiesthroughqualitativeandquantitativeriskmanagementprocesses.Engagewithrealeconomycompaniesandindustryinitiatives,signalingdemandfornature-relateddisclosuresanddatatobeabletoassesstheirportfolioriskexposures.Setportfolioemissionsreductiontargetsinlinewiththelatestclimatescience,anddisclosecommitmentsandtargetsonenvironmentalissuesmoregenerally,goingbeyondclimatechange.Influenceandengagetheirclientsandsupportthemontheirjourneytoanet-zero,nature-positivefuture,futureproofingtheirclients’businessesaswellastheirownprofitandlossstatements(P&Ls).412356713CDPFinancialServicesReport2023Calltoactionforgovernments,centralbanks,regulators,supervisorsandstockexchangesCalltoactionforstandardsettersIntroduceHighQualityMandatoryDisclosurerequirementsforcorporatesandFIs1.CreateanenablingenvironmenttoencourageallcorporatesandFIstoassessanddisclosetheirrisks,dependencies,andimpactsonnature.Alignfinancialandfiscalpolicieswithabroadersetofenvironmentalsustainabilityobjectives.Ensurestandardsareinplacetostreamlinereporting,enablecomparabledatatoinformcapitalallocationdecision-making,andtomaximizeglobalalignmentformeetingglobalenvironmentalgoals.Worktowardsincorporatingfullenvironmentalimpactsacrosssustainabilityreportingstandardstoimprovetransparency,accountability,andmeaningfulactiontowardanature-positiveworld.Coordinateeffortstoensureharmonizationandinteroperabilityofstandardstoavoidmarketconfusion.Insummary,thisreportunderscorestheurgencyandopportunityinredefiningholisticenvironmentalaction,incorporatingallnaturerelatedimpacts.Whilechallengespersist,initialeffortsarepromisingandindicativeofaparadigmshiftinthefinancialsectortowardsasustainable,nature-inclusiveapproach.Therestofthisreportprovidesamoredetailedanalysisoffinancialinstitutions’currentenvironmentaldisclosures,alongwithpracticalinsightsandrecommendationsforallstakeholders.1122331In2021,CDPpublishedfivemainrecommendationsforhigh-qualitymandatoryclimatedisclosure.Giventheevolvinglandscapeofdisclosureregulationintomorethanclimateandencompassingbiodiversityandnatureacrosstherealmsofland,freshwater,oceanandatmosphere,CDPisnowupdatingtheprinciplesbydrawingfromthenewpoliciesandvoluntaryinitiatives.TherevisedprinciplesarecurrentlyunderconsultationandwillbepublishedbyQ32023,togetherwithananalysisofjurisdictionalprogressonimplementingenvironmentaldisclosureregulations.14CDPFinancialServicesReport2023Figure1:RegionalbreakdownofrespondersSampleoverviewanddetailedfindingsdisclosingfinancialinstitutionsThisrepresentsa37%increasefrom2021,anda67%increasefrom2020,whenthesector-specificquestionnairewaslaunched.Ofthe556disclosers,272FIsdisclosedinformationondeforestation,whilst275disclosedonwatersecurity2.Over75%ofthesedisclosingFIsarepubliclylistedcompanies,includingsomeoftheworld’slargestbanks,assetmanagers,assetownersandinsurers,representingoverUS$8trillioninmarketcapitalization.ThesampleofFIsthatwebasethesefindingson,disclosedthroughCDPbetweenAprilandAugust2022.In2022,556FIsdisclosedthroughCDP’sclimatechangequestionnaireforFinancialServices(FS)companies.2ForForestsandWater,thenumberofcompaniesthatsawthequestionsdependedonhowtheyansweredC-FS0.7,indicatingtheexposureoftheirfinancingtowardscertainsectors.Iftheyhavesufficientexposure(>20%)tosectorswithacriticalimpactondeforestationorwatersecurity(definedinalignmentwithCDP’smaterialitymatrices),thentheywererequestedtodiscloseontheassociatedforestsand/orwaterquestions.Ofthe556disclosersCDP’sFSquestionnaire,556disclosedtoclimatechange,ofwhich368sawForestsquestions,and372sawWaterSecurityquestions.Africa&MiddleEastAsiaPacificEuropeLatinAmericaNorthAmerica31202015715838322311411633161124040020015010025050ForestsClimatechangeWatersecurity15CDPFinancialServicesReport2023Financialinstitutions,includinginvestors,banksandinsurersareallatdifferentstagesofactiononnature,withdifferentdriversandtoolsavailabletomeettheirrequirements.Thisreportdoesnotaimtocomparethesesub-sectorswithoneanother.52+270FIs148FIs208FIs259FIscountriesFIsfrom$$disclosedin2022,andbetweenthem,theyundertakemultiplefinancialactivities.undertakebankingconductinsuranceunderwritinginvestasassetownersinvestasassetmanagers16CDPFinancialServicesReport2023DetailedfindingsGovernanceEstablishingnature-relatedoversightinorganization-widegovernanceprocessesiscriticaltothesystematicintegrationofnature-relatedissuesacrossFIs.OnlyasmallgroupofleadingFIscurrentlyhavethetop-downleadershiptooverseethisintegration.Disclosuresunderscoretheneedforthesectortoenhanceboard-levelexpertiseandgovernancemechanismsthatconsidernature-relatedrisksandopportunities,alongsideclimatechange.Board-leveloversightBoardoversightisakeyindicatorofhowseriouslyabusinessistakingenvironmentalconcernsaspartoftheiroversightofriskandperformancemanagement.Almostall(91%)financialinstitutionsreportingthroughCDPhaveboard-leveloversightofclimate-relatedissues.However,only32%offinancialinstitutionsdisclosethattheyhaveoversightofforestsand/orwater-relatedissues,andanadditional19%donot,butarecurrentlyplanningtohavethisoversightwithinthenexttwoyears.Figure2:Isthereboard-leveloversightoftheissueswithinyourorganization?191%5%4%Yes(watersecurity)Yes(forests)Yes(climate)No,butweplantowithinthenexttwoyearsNo,butwedonotplantointhenexttwoyearsDidnotrespondForestsWaterClimate32%23%26%19%32%22%27%19%17CDPFinancialServicesReport2023Board-leveloversight:CompetenceBoard-leveloversight:MaterialityAnotherkeyindicatorofthestrengthofgovernanceprocessesistheskillsandcompetenceoftheboardtoassessclimateandnature-relatedrisksandopportunities.Whenaskediftheirorganizationshaveboardmemberswithcompetenceonenvironmentalissues,68%disclosehavingatleastoneboardmemberwithcompetenceforclimate-relatedissues.Thatnumberdropssignificantlyto24%forforestsandwatersecurity.ThemajorityofFIsthatdonothavethiscompetenceontheirboardindicatethattheyseetheissueasimportant,butnotanimmediatepriority.Thescopeofboardoversightvariessignificantly.Wefindthatwherethereisboard-leveloversight,81%ofFIshaveoversightofclimate-relatedrisksandopportunitiesthatpertaintotheirfinancingactivities(financialmateriality),whilst63%havethesameforforests,andonly50%forwatersecurity.Therearesignificantdifferencesacrossthosethathaveactivitiesspanningbanking,insurance,and/orinvesting(eitherasanassetmanagerand/oranassetowner),andacrossenvironmentalthemes.Figure3:Scopeofboard-leveloversight(whereapplicable)040%60%80%100%20%Financialmateriality:EnvironmentalrisksandopportunitiestoourfinancingactivitiesImpactmateriality:TheimpactofourfinancingontheenvironmentBanksInsurers(underwriting)Investors(assetmanagement)Investors(assetownership)ClimateForestsWatersecurity040%60%80%100%20%BanksInsurers(underwriting)Investors(assetmanagement)Investors(assetownership)ClimateForestsWatersecurity18CDPFinancialServicesReport2023WeseeasignificantdropinthenumberofFIsthatcurrentlyconsidertheimpactsoftheirfinancingactivitiesontheenvironment(impactmateriality)–acrossallportfoliosthescopeis58%(climate),45%(forests),and33%(watersecurity).TheEU’ssustainablefinancelegislation(includingtheEuropeanSustainabilityReportingStandards(ESRS),andPrincipleAdverseImpactIndicatorsincludedaspartoftheSustainableFinanceDisclosureRegulation(SFDR))requiresthatcompaniesreportonimpactmateriality,aspartofanassessmentofdoublemateriality.Intheirdraftguidelinesforstandardsetting,theEuropeanFinancialReportingAdvisoryGroup(EFRAG)notesthat:Theevidenceofthisinterconnectednesstobroaderenvironmentalissuesatamacro-scaleisclear–withoverhalftheworld’stotalGDPbeingmoderatelyorhighlydependentonnatureanditsservices.CDPdatashowsthatbanksareleadingtheway,withthemajorityofbanksdisclosingthroughCDPdemonstratingboard-leveloversightofclimateandnature-relatedissues,whilstalsoconsideringbothfinancialmaterialityandtheirownenvironmentalimpacts.Thereisanoticeabledeclineinconsideringtheimpactmaterialityofnatureacrossunderwritingandinvestingactivities.Astheunderstandingofthefinancialimplicationsofnaturelossevolves,especiallywithrespecttothecompoundingrelationshipbetweenclimatechangeandnature,andasdisclosureofenvironmentalimpactsbecomesnormalized,wecananticipateincreasingpressureonboardstotakestockoftheirimpacts.Impactmaterialityandfinancialmaterialityassessmentsareintertwinedandinterdependenciesbetweenthetwodimensionsshouldbeconsidered.PercentageofFIscurrentlyconsideringtheenvironmentalimpactsoftheirfinancingenvironments,byscope:Climate58%45%Forests33%Water19CDPFinancialServicesReport2023ManagementprocessesInadditiontoboard-leveloversight,robustmanagementprocessesarenecessarytoeffectivelyassessandmanageclimate-relatedrisksandopportunities.93%ofFIsdisclosedthattheyhaveanindividualorcommitteewithresponsibilityforclimate-relatedissues,whilst49%havethesameforforestsand/orwater-relatedissues.Overhalfofmanagement-levelpositionsorcommitteeswithresponsibilityforclimatechangereportdirectlytotheboard(61%)ortotheCEO(54%),butthisreportinglinedropstolessthan30%forforestsandwater-relatedmanagementprocesses(30%totheboard,25%totheCEO).Furthermore,whilethereportingofclimatechangethroughthesemanagementprocessesoccursatregularintervals(atleastannually,ifnotmorefrequently),mostreportnature-relatedissuesinfrequently,“asimportantmattersarise”.Aswefindinthesubsequentsectiononriskandopportunitymanagement,thereiscurrentlyagapinthenumberofFIsthathavenature-relatedriskmanagementandduediligenceprocessesinplace.Thismeansthatthereislikelyanunder-representationofnature-relatedriskscomingtotheattentionofmostboards.93%ofFIshaveanindividualorcommitteewithresponsibilityforclimate-relatedissues,49%havethesameforforestsand/orwater-relatedissues.while20CDPFinancialServicesReport2023RiskandopportunitiesFinancialinstitutionsmustincorporatenature-relatedriskandopportunityassessmentsintotheirstrategiesandfinancialplanning.Atpresent,mostFIsdonothavetheprocessesinplacetoadequatelyassessthenature-relatedrisksandopportunitiestowhichtheirportfoliosareexposed.ThisgapinawarenessmeansthatmostFIsremainvulnerabletounanticipatedfinancialimpacts.Critically,themajorityofthosethatarebeginningtoassesstheirportfolioexposuretonature-relatedrisksandopportunitiesareidentifyingfinanciallymaterialrisksandopportunities.AssummarizedbytheCambridgeInstituteforSustainabilityLeadership,ecosystemcollapseandnaturelossincreasesriskexposureforallfinancialinstitutionsacrosstheirportfolioandoperations.Growingawarenessandactionbycentralbanksonnature-relatedrisks,largelysteeredbytheNetworkforGreeningtheFinancialSystem(NGFS),ismainstreamingthistopicaspartofrecenteffortstoimproveenvironmentalriskmanagementpracticesacrossbanksandinsurers.Forexample,manybanksfacesignificantcreditandreputationalrisksstemmingfromnature-relatedexposuresegthroughprojectfinanceinhigh-riskindustries,and/orlendingtoSMEsinlocationsthatareexposedtoagreaterlevelofrisk3.Similarly,insurersareimpactedbyincreasedinsuranceclaimsfollowingintensifyingenvironmentaldisastersthatleadtobusinessdisruptions,andposeotherphysical,transitionandliabilityrisks4.Whilethereisincreasedacknowledgmentofthematerialityofnature-relatedrisks,mostinsurersarenotassessingtheserisksintheirunderwriting,accordingtoaglobalsurveyandanNGFS-INSPIREreport.Thereissubstantialroomforwideradoptionandrobustriskassessmentprocesses.Encouragingly,anincreasingnumberofFIsareidentifyingopportunitieslinkedtoforests,watersecurityandbiodiversity,signalinganexcitingfrontierofsustainability-driveninnovationinthesector.23UNEP-FI,2023,https://www.unepfi.org/publications/tnfd-financial-market-readiness-report/4https://www.cisl.cam.ac.uk/files/why_nature_matters.pdf21CDPFinancialServicesReport2023Investorsbearafiduciarydutytowardstheirbeneficiaries,requiringthattheyidentifyandevaluaterelevantandmaterialriskstotheirinvestmentswhileimplementingmeasurestocontroltheserisks.Thisresponsibilityisjudiciouslyupheldbyfinancialinstitutions,whoemployamultitudeofriskmanagementstrategiestobolstertherobustnessoftheirfinancingandtosecuretheassociatedreturns.Thedeclineofnaturedamagesecosystemservicesthatcompaniesrelyupon,makingnaturelossafinancialrisktocompaniesandgovernments,financialmarkets,andeventhephysicalassetsoffinancialinstitutions:{Physicalriskstoinvestors,lenders,insurers,governmentswillleadtofinancialinstability,credit,market,liquidity,andbusinessrisks5.{Transitionandliabilityrisksemergingfromcurrentandfutureregulationaimedatprotectingnaturelossmighteconomicallyimpactcertaincompaniesandrelatedfinancialinstitutions.{Naturelossmaterializesasafinancialriskwhentheserisksaffectcompaniesandgovernments,financialmarkets,andeventhephysicalassetsoffinancialinstitutions,leadingtocredit,market,liquidity,andbusinessrisks6.{Climatechange,inadditiontoposingitsownphysicalandtransitionrisks,isakeydriverfornaturelossandexacerbatestherisksstemmingfromissuessuchasdeforestationandwaterinsecurity.Itisthereforecriticalthatfinancialinstitutionshaveprocessesinplace,suchasportfolioriskassessmentsortransactionalduediligence,toidentify,assess,andmanageallformsofrisksacrosstheirfinancingportfolios.DisclosuresindicateanoticeablegapinriskassessmentpracticesamongFIs.85%areassessingtheirportfolioexposurestoclimate-relatedrisksandopportunities,comparedto20%assessingtheirforestsand/orwater-relatedriskexposures.Thesenumbersriseto95%,47%and45%(onclimatechange,forestsandwatersecurityrespectively)whenincludingthenumberofFIsthatplantoassesstheirportfolioexposureswithinthenexttwoyears.5https://www.cisl.cam.ac.uk/system/files/documents/handbook-for-nature-related-financial.pdf6SeeB.6.3-https://report.ipcc.ch/ar6syr/pdf/IPCC_AR6_SYR_SPM.pdfRiskandopportunitymanagementandduediligenceprocesses>50%ofFIsdonotcurrentlyassesstheirforestsand/orwater-relatedrisks,nordotheyplantodosowithinthenexttwoyears.22CDPFinancialServicesReport2023Thisbreaksdownbysub-sectorasfollows:Intotal,over90%oftheseportfolioassessmentsforclimatechangeareatleastinpart,quantitative.Incomparison,60%oftheassessmentsforforestsandwaterinvolvequantitativeaspects,withamuchgreaterrelianceontheuseofqualitative-onlyassessments.ThisispartlyduetothematurityofthelandscapeoftoolsanddataavailabletoFIstoassessclimateandnature-relatedrisks.Moreover,thenatureofriskassessmentsispredominantlyqualitativeduetothechallengeofobtainingrelevantquantitativedata.Althoughthisbringscomplexitytonature-relatedriskassessments,italsoemphasizesthevalueofqualitativeanalyses.Theseanalyses,whilenotyetwidespread,canoffervitalinsightsintopotentialnature-relatedrisksandserveasastrongfoundationforthedevelopmentofquantitativemetricsinthefuture.Riskassessmentprocessesareoftenfocusedonhigh-emittingand/orhigh-risksectorsandcompanies.Incasesofbestpractice,riskassessmentprocessesarebeingguidedbyrobustmateriality85%20%ofFIsareassessingtheirportfolioexposurestoclimate-relatedrisksandopportunities.areassessingforforestsand/orwater-relatedriskexposures.OnlyFigure4:AreFIsassessingtheirportfolio’sexposuretoclimate-,forest-and/orwater-relatedrisksandopportunities?ClimateForestsWaterClimateForestsWaterClimateForestsWaterClimateForestsWater0405060708090100203010%ofFIsBanksInsurersAssetmanagersAssetownersNo,butweplantowithinthenexttwoyearsYes23CDPFinancialServicesReport2023ClimatechangeForestsWatersecurity1EmissionsdataScopeandcontentofforestspolicyScopeandcontentofwaterpolicy2EmissionsreductiontargetsCommitmenttoeliminatedeforestation/conversionofothernaturalecosystemsWaterwithdrawaland/orconsumptionvolumes3ClimatetransitionplansCertificationofforestsriskcommoditiesBreachestolocalwaterregulations4EnergyusagedataOtherOther5OtherOriginofforestriskcommoditiesWaterwithdrawnfromwaterstressedareasassessmentstoidentifyrelevantcompaniesandsectorswithintheirportfolios.Mostcommonly,environmentalconsiderationsareintegratedintoamulti-disciplinarycompany-wideriskmanagementprocess(climatechange,72%;forests,63%;andwater,66%).LeadingFIstendtohaveaspecificclimateorESG-relatedriskmanagementprocesstoaddresstheuniquecharacteristicsofclimate-relatedrisks.OfthoseFIsthatareconductingduediligenceassessments:{Themostcommonsourceofthisinformationisdirectlyfromclients/investees,indicatingtheimportanceofthesecompaniesthemselvescollectingrelevantenvironmentaldataandthesignificanceoftakingaction.Thenextmostfrequentsourceispublicdatasources,highlightingthevalueofpublicdisclosurestotheirstakeholders.{FIsaremostfrequentlyfocusedonthefollowingtypesofinformationpertheme(seetablebelow).Thesearethereforekeyareasforrealeconomycompaniestoadvancethequalityandquantityofthedatatheycollectanddisclose.Itindicatesthegrowingdemandbyfinanciersoftheirclients/investeestohaveclimatetransitionplansinplace,aswellashavingforestsandwater-relatedpolicies.Table2:ThemostfrequentlyconsideredtypesofinformationduringtheduediligenceandriskassessmentprocessesofFIs24CDPFinancialServicesReport2023WHEBAssetManagement–ThematicinvestinginwaterAegon–ResponsibleinvestmentpolicyBancoSantander–WaterstresscalculatorAegon7includesbiodiversityintheirResponsibleInvestmentPolicy,whichdrillsdowntotheindividualinvestmentpoliciesoftheirsubsidiaryfirms.Inpractice,theyexpectinvesteecompaniestoassessandmanagevariousriskdriversthatcouldthreatenbiodiversityordrivedeforestationintheirdirectoperationsaswellastheirsupplychains.Aegonalsoengagesdirectlywithcompaniesidentifiedasbeinginhigh-risksectors.BancoSantanderacknowledgeswaterisbecomingscarcerforsomeofitsclientsanditmustconsidermonitoringtheirvulnerabilitytothisissue,especiallyinthoseregionswherethisconcernisofrelevance,suchasinBrazil.SantanderBrasilincorporateswaterstressintoitsEnvironmental,SocialandClimateChangeratingsystemforcompaniesthatitreviews.Thismodelincludesassessmentsofsupplychainpractices,fines,landdegradationexposures,andaprofileofthecompanies’environmentalandsocialmanagementprocesses.WaterstressisexplicitlyincludedinthecalculatorusedbySantanderBrasil,factoringintheeconomicactivitiesbeingundertaken,theriverbasin(s)thatacompanyisexposedto,andthemeasuresthatthosecompaniesareadoptingtosavewater.RiskmanagementcasestudiesUponanalysisofthedescriptionsoftheseportfolioexposureassessmentsandduediligenceprocesses,weseesomeexamplesofleadingpractice:7Thecasestudyaboveencompassesactivitieswithinthe2021/22periodandmaynotreflectrecentorfutureevolutionsofAegon’sResponsibleInvestmentPolicy.Pleasenotethatthecasestudiesaboveandthroughoutthisreportencompassactivitieswithinthe2021/22period,andtheymaynotreflectrecentorfuturedevelopmentsoftheseactivities.ProprietaryESGscreensandscorecardsareusedbysomeFIs,toidentifyvulnerablesectorsandoperatingregionsthatmaybedesignatedashighriskorhighimpacttospecificclimate,forestsandwatersecurityissues.Thesethenhaveabroadrangeofimplicationsforportfoliomanagement,rangingfromexclusionpolicies,totiltingofportfolioexposures,orinsomecasesathematic,opportunisticapproachsuchasthatofWHEBAssetManagement,whohaveaspecificwatermanagementthemetosomeoftheirinvestments,investingincompaniesthatderiveatleast50%oftheirrevenuesfromsolutionstowaterpollutionandwaterscarcity.25CDPFinancialServicesReport202310%and13%ofFIs,respectively,haveidentifiedforests-andwater-relatedrisksintheirportfolio.72%Climate10%Forests13%WaterRisksandopportunitiesidentifiedWhilst398(72%)ofFIshaveidentifiedclimate-relatedrisksintheirportfoliowiththepotentialtohaveasubstantivefinancialorstrategicimpactontheirbusiness,only35(10%)and48(13%)havedonesoforforestsandwaterrespectively.Itisasimilarpictureforopportunities,thoughagreaternumberarefindingopportunities.Giventhatonly20%ofportfoliosarebeingassessedfortheirexposuretoanynature-relatedrisksoropportunities,thisindicatesthatamajorityofFIsthathaveconductedtheseassessmentsarealreadybeginningtoidentifyfinanciallymaterialrisksandopportunities.FIshaveidentifiedrelatedrisksintheirportfolioswithfinancialorstrategicimpactTable3:Haveyouidentifiedanyinherentclimate-,forests-and/orwater-relatedrisks/opportunitiesinyourportfoliowiththepotentialtohaveasubstantivefinancialorstrategicimpactonyourbusiness?RisksidentifiedOpportunitiesidentifiedClimateForestsWatersecurityClimateForestsWatersecurityYes72%10%13%82%13%15%No(orleftblank)28%90%87%18%87%85%26CDPFinancialServicesReport2023RisksFIsidentifiedclimate-relatedriskswiththepotentialtobefinanciallysubstantive,totaleduptoamaximumofUS$1.17trillion,oronaverage(acrossthe260FIsdisclosingfinancialimpactfigures),US$4.5billionperFI.ThereisgrowingunderstandingacrossFIsastohowbothphysicalandtransitionclimateriskcanbeassessedacrossportfolios.Transitionrisksdrivethemajority(70%)ofrisksvalued,with30%drivenbyphysicalrisks.260FIsdisclosedthattheyfaceatotalofUS$1.17trillioninpotentialrisksduetoclimatechange.0100150200250500100200Numberoftimesriskreported300400AcutephysicalChronicphysicalCurrentregulationEmergingregulationLegalMarketReputationTechnologyAggregatedvaluationsofmaximumpotentialimpactduetoclimateriskdrivers(inUS$billions)NumberoftimesriskreportedFigure5:Aggregatedvaluationsofmaximumpotentialimpactduetoclimateriskdrivers27CDPFinancialServicesReport2023Pleasenotethatthecasestudiesaboveandthroughoutthisreportencompassactivitieswithinthe2021/22period,andtheymaynotreflectrecentorfuturedevelopmentsoftheseactivities.Excludingoutliervalues.US$3.57billioninpotentialrisksduetodeforestation.US$5.90billioninpotentialrisksduetowatersecurity.Incomparisontoclimatechange,ofthe10-13%ofFIsdetectingforestsandwater-relatedriskswiththepotentialtobefinanciallysubstantive,evenfewerareabletocalculateanddiscloseafigureindicatingthesizeofthoserisks.{11FIsdisclosedthattheyfaceanaverageofUS$325millionofpotentialriskseach,duetodeforestation.Someoftheserelatetotheincreasedinsuranceclaimsliabilitiesandincreasedoperatingcostsfortheirportfoliocompanies,whilstanothercommonconcernisthereduceddemandand/orprofitabilityoftheirproductsandservicesduetoreputationaldamageassociatedwithdeforestation.{22FIsdisclosedanaverageofUS$268millioninpotentialriskseach,duetowaterinsecurity.Thesepredominantlyfocusonacuteandchronicphysicalriskdrivers(flooding,drought,andwaterscarcity)thatcouldincreaseoperatingcosts,reduceproductioncapacities,increaseinsuranceclaimsliabilities,andleadtostrandedassets.Reputationalclimate-relatedriskdriversareonaveragethemostcostlyrisksperceivedbyFIs.Primarily,thisisrelatedtodecreasedrevenuesduetoaccesstocapitalalongwithreduceddemandforproductsandservices,anditisdrivenbytheincreasedconcernfromstakeholders.ThereisanincreasingappreciationamongFIsthatforest-relatedreputationalrisksarealsomaterial.However,thereiscurrentlyasignificantgapbetweentheperceptionofclimateandnature-relatedreputationalrisksbyFIs.Aspublicunderstandingbetweenclimatechangeandnaturelossgrows,stakeholderconcernmaydriveupnature-relatedreputationalrisks.11FIs22FIsdisclosedthattheyfaceatotalofdisclosedthattheyfaceatotalofBNPParibas–ForestriskassessmentNotably,onefinancialinstitutionisleadingtheway.BNPParibasdisclosedthatthroughtheincreasingawarenessofdeforestation,criticalfeedbackfromNGOsandcivilsociety,andincreasingriskoflitigationasafinancierofindustriesthatmaycontributetodeforestation,theyfacesizeablepotentialfinancialrisksdrivenbyreputationalconcerns–intheorderof25%oftheirmarketvalue.Thisfollowsonfromadetailednaturalcapitalassessmentthattheyhavebeenrunningsince2017.28CDPFinancialServicesReport2023Climateandnature-relatedriskdriversThegapinFIs’currentlevelofriskassessmentisfurtheroutlinedwhencomparedwiththescaleofrisksreportedbyrealeconomycompaniesintheirdisclosuresthroughCDP.Thefollowinggraphshighlightthemostfrequentlyreportedriskdriversoffinanciallymaterialclimaterisks,asaproportionofthenumberofFIsthatidentifiedanymaterialclimate,forests,orwater-relatedrisks.Climatechange:EmergingregulationCarbonpricingmechanisms,aformofemergingregulation,werethemostfrequentlyreportedclimate-relatedriskdriveroffinanciallymaterialrisks,identifiedby:27%ofFIs(108ofthe398thatidentifiedfinanciallymaterialclimate-relatedrisks).Flooding,anacutephysicalrisk,wasthemostfrequentlyreportedwater-relatedriskdriveroffinanciallymaterialrisks,identifiedby:25%ofFIs(12ofthe53FIsthatidentifiedwater-relatedrisks).{Floodinganddrought,thenextmostcommonriskdriverreportedby10FIs,arebothintrinsicallylinkedtoclimatechange.WithfloodingalsobeingoneofthemostreportedriskdriversforFIsonclimatechange,thishighlightsthatrisksintheclimate-naturenexusarebeingidentifiedbyFIs.{US$15.5billionhasbeenstranded,orisatrisk,basedonseveralcasestudiesfromkeysectorswithhighlevelsofwaterusage–changesinwaterregulation,highlevelsofpollution,andcommunityoppositionarealldrivingstrandedassets.27%Climate23%Forests25%WaterCDP’s2022GlobalForestsReportshowsthatcompaniesidentifiedforest-relatedrisksofUS$300millioneachonaverage.Worryingly,thesemightbeunderestimates,asthereareblindspotsincompanies’assessmentsandmanagementpracticesofforest-relatedrisks:{Only3%ofdisclosingcompanieshaveconductedacomprehensiveforest-relatedriskassessment,mappingtheirentirevaluechainsandreportinglocationsoftheiroperationsandsuppliers.{Onlyone-thirdofcompanies(31%)haveoversightandcompetenceofforest-relatedissues,withmanagement-levelresponsibilityforbothassessingandmanagingforests-relatedrisksandopportunities.Forests:ReputationalriskWater:AcutephysicalriskClimatechangeisonlyonedriverofnature-relatedrisks–tomanagetheirexposures,FIsneedtoviewforestandwater-relatedriskmoreholistically.Reputationalriskdrivenbynegativemediacoverage(relatedtofinancing/insuringofprojectsoractivitieswithnegativeimpactsonforests)werethemostfrequentlyreportedforest-relatedriskdriveroffinanciallymaterialrisks,identifiedby:23%ofFIs(8ofthe35thatidentifiedforests-relatedrisks).29CDPFinancialServicesReport2023OpportunitiesIntotal,FIsreportedthattheyfindopportunitiesaggregatinguptoUS$5.35trillioninvalueacrossclimatechange,forests,andwater.Over50%oftheidentifiedfinancialopportunitiesrelatedtoforestsandwateraredirectlytiedtothedevelopmentoffinancingproductsandsolutionsthatsupportsustainablesupplychainsforforestriskcommodities,andwatersecurityorresilience.Examplesincludethefacilitationofgreenandsustainability-linkedbondsandloans,andbuildingresiliencethroughinnovativeandtailoredinsuranceproducts.Thisissimilarforclimatechange,whereover80%oftheopportunitiesareseentobethecreationofproductsandservices.Theseopportunitiesarediverse,spanningvarioussectorsandcategoriessuchasthecreationofinnovativeenvironmentalproductsandservices.AnincreasingnumberofFIsareidentifyinggreateropportunitiesthanrisksacrossclimatechange,forestsandwatersecurity,demonstratingthataccelerationofgreenfinancingsolutionscouldbolsterFIsabilitytoprioritizenatureasafactorinfinancialdecision-making.Wherepossible,duplicatedandunsubstantiatedvaluesinthetop5thpercentilewereremovedbeforesummingthemaximumreportedvaluesofopportunitiesdisclosedbyfinancialinstitutions.264FIs.16FIs.23FIs.US$5.28trillioninclimate-relatedopportunitiesdisclosedbyUS$24billioninforest-relatedopportunitiesdisclosedbyUS$35billioninwater-relatedopportunitiesdisclosedbyFIsreportedthattheyfindopportunitiesaggregatinguptoUS$5.35trillioninvalueacrossclimatechange,forests,andwater.30CDPFinancialServicesReport2023Pleasenotethatthecasestudiesaboveandthroughoutthisreportencompassactivitieswithinthe2021/22period,andtheymaynotreflectrecentorfuturedevelopmentsoftheseactivities.OpportunitiescasestudiesCiti–SupplierfinanceprogrammeTheacknowledgementofthefinancialmaterialityofnaturebyleadingFIsrepresentsanimportantfirststepintheindustry,indicatingadesiretostartusingavailabletoolsandguidancetoassessandproperlyvaluenature-relatedrisksandopportunities.EventhoughtherelativecapacityandawarenessofFIstoassessthedifferenttransmissionchannelsandtheextentofnature-relatedrisksisstilllaggingincomparisontoclimate-relatedrisks,therearegreenshootsinthesector.FIsthatidentifynature-relatedfinancialrisksarebetterpositionedtoseizeopportunitiestodevelopproductsandsolutionstohaltandreversenatureloss.Asthedifficultiesassociatedwithvaluingnatureandecosystemservicesarebeingresolvedintime,FIswillbeabletoidentifyprecisevaluationsofnewavailableopportunities.GarantiBBVA–WaterfootprintloanBBVAhascreatedanewsustainableloanthatfocusesonreducingcompanies’waterfootprint,akeypriorityinmanycompanies’sustainabilitypolicies.ThewaterfootprintloanconsidersspecificwaterindicatorsandCDP’sWaterscore.Banksareabletoplayaroleinhelpingtheirclientsdecarbonizetheirsupplychainsbyincentivizingemissionsdisclosures,whichmayhelptofacilitateimprovingtransparencyinScope3emissionsandsupplychainresilience.CitisupportedVodafone’sinitiativetoaddenvironmentaldatareportedviaCDPasanadditionalfactortoaccesspreferentialfinancingratesthroughVodafone’sSupplyChainFinanceProgramme(SCF).EligiblesupplierstoVodafonemaynowbeabletoaccesspreferentialSCFratesfromCitibydisclosingenvironmentaldatathroughCDPanddemonstratingimprovementstotheirperformance.ThishelpsVodafonemeetitsScope3emissionstargets,whilstrewardingsuppliersthattakeenvironmentalaction.31CDPFinancialServicesReport2023Climatestrategiesareessentialforfuture-proofingportfoliosandoperations.Arobustandwell-informedstrategycanbethedifferencebetweenFIsthatareawareofandabletoaddresspotentialrisksstemmingfromclimatechangeandnatureloss,andthosethatarenot.ArobuststrategycanenableFIstobenefitfromopportunitiesarisingfromthetransitiontoanet-zero,nature-positiveglobaleconomy.Toeffectivelyassessthefinancialimpactsonclimate-relatedrisksandopportunitiesandplanahead,manyFIsundertakeclimate-relatedscenarioanalysis.Thisisoftenemployedalongsidetraditionalbottom-upduediligenceofcompaniesaspartoftheportfolioconstructionprocess.StrategyandimplementationClimatechangenowinfluencesthebusinessstrategiesorfinancialplanningofnearlyalldisclosingFIs(95%),andanemergingminorityofFIs’strategiesarealsoinfluencedbybroadernature-relatedrisksandopportunities(26%and28%forforestsandwatersecurityrespectively).ScenarioanalysisScenarioanalysisusesvariousclimatescenariostostresstesthowpotentialrisksandopportunitiescouldevolveandimpactabusiness.Themodelsthatunderpincommonlyusedscenariosaretiedtonature-relatedoutcomes.However,mostoftheIPCC’sglobalmodelledmitigationpathwaysthatreachnet-zeroarepredicatedontheassumptionthatforestryandlandusechange,reachnet-zeroemissionsearlier(viareduceddeforestationandreforestation)thansectorssuchasbuildings,industry,andtransport8.Thereisthereforeaneedtodevelopandimplementtoolsandmethodologiesthatadequatelyaccountfornaturewhenconductingscenarioanalysis.8SeeB.6.3-https://report.ipcc.ch/ar6syr/pdf/IPCC_AR6_SYR_SPM.pdf332CDPFinancialServicesReport2023Despitethecomparativelackofmainstreamguidancetoincludenatureinscenarioanalysis,someleadingFIsarealreadyexpandingtheirclimate-relatedscenarioanalysisbyincorporatingforests-andwater-relatedfactors.{65%ofFIs(336outof516FIs)conductedclimate-relatedscenarioanalysisin2022,upfrom57%in2020,whilst7%(25outof368FIs)and10%(38outof370FIs)didsoforforestsandwater,respectively.{Mostoftheseforests-andwater-relatedscenarioanalysesarebeingconductedaspartofclimate-relatedscenarioanalysis,indicatingthatFIsaretakinganintegratedapproach.Thisispromising,asmarketleadersareinalignmentwiththeTNFD’sgoaltoworktowardstheuseofscenariosthatfullyintegrateconsiderationsofclimateandnature.TheTNFDframework,settobereleasedinSeptember2023,willincludeguidanceforcorporatesconductingnature-relatedscenarioanalysis.PilottestsconductedbyassetownersoftheTNFD’sdraftmethodsindicatethattherearewaysinwhichtheguidancecouldbeusedandadaptedforFIs.ThiswillbeaccompaniedbyeffortsfromtheNGFStodevelopaframeworkforidentifyingandassessingnature-relatedrisksandnaturelossscenarios,buildingontheirclimatescenarios,whicharethemostusedbyFIsdisclosingthroughCDP(46%,or155outof336FIscurrentlyconductingclimate-relatedscenarioanalysisusingNGFSscenarios).TheinfluenceoftheworkoftheNGFSandtheincreasingprevalenceofclimatechangewithincentralbanks’considerationsisbackedbythedata–thesub-sectorsconductingthemostclimate-relatedscenarioanalysisarebanksandinsurers(69%and71%respectively).65%7%10%ofFIs(336)conductedclimate-relatedscenarioanalysisin2022.ofFIs(25)didsoforforests.ofFIs(38)didsoforwater.ClientandinvesteerequirementsandengagementEngagementisakeyleverthatFIscanemploytopreserveandenhancethevalueofassetsonbehalfoftheirclientsandbeneficiaries,whichincludesinvesteesandclientsaddressingclimate-andnature-relatedrisks.Tomitigatetheserisksfromtherealeconomy,FIsareincludingclimateandnature-relatedrequirementsfortheirclientsandinvesteesacrossvariousinternalandexternal-facingpolicyframeworks.33CDPFinancialServicesReport2023Nature-relatedfinancingpoliciesandengagementstrategiesareyettobeestablishedandcomprehensivelyimplemented.{Forclimatechange,59%ofFIshaveapolicyframeworkwhichincludesclimate-relatedrequirementsthattheirclients/investeesneedtomeet.Forforestsandwater,thisdropsto26%and19%respectively,or46%and40%whenincludingFIsthatintendtointroducearelevantpolicyframeworkwithinthenexttwoyears.FIsincludeclimate-,forests-orwater-relatedrequirementsoftheirclients/investeesacrossavarietyofpolicies–someoftheseareincludedaspartofgeneralinvestment,lendingandriskpolicies,whilstothersarededicatedESGorresponsibleinvestmentpolicies.Inmanycases,thesepoliciesfocusonsectorswithhigherexposurestomaterialenvironmentalrisks.{Assetmanagersandassetownersmostcommonlyincludetheserequirementsinsustainableorresponsibleinvestmentpolicies,orintheirgeneralinvestmentpolicies/strategies.{Banksgenerallyincludetheserequirementsintheircredit/lendingpolicies,ortheirriskpolicies.{OftheinsurersdisclosingthroughCDP,onlyonedisclosedhavingaforests-relatedpolicy,whilstnoinsurersdisclosedanywater-relatedinformation–onclimatechange,70%ofrespondinginsurersincludesuchrequirementsintheirinsuranceunderwritingpolicy.34CDPFinancialServicesReport202326%19%forforests,andThisdropstoforwater.59%ofFIshaveapolicyframeworkwhichincludesclimate-relatedrequirementsthattheirclients/investeesneedtomeet.PolicyCCFWBankingCredit/lendingpolicy82%86%55%Riskpolicy39%36%13%Investing(assetowner)Sustainable/Responsibleinvestmentpolicy70%83%55%Investmentpolicy/strategy40%42%27%Investing(assetmanager)Sustainable/Responsibleinvestmentpolicy84%69%42%Investmentpolicy/strategy33%38%26%Proxyvoting39%0%0%Engagementpolicy42%0%0%InsuranceInsuranceunderwritingpolicy70%0%0Table4:Mostcommonlydisclosedpolicieswhichincludeclimate-,forests-and/orwater-relatedrequirementsthatclients/investeesneedtomeet.35CDPFinancialServicesReport2023Strategy&implementationcasestudiesPleasenotethatthecasestudiesaboveandthroughoutthisreportencompassactivitieswithinthe2021/22period,andtheymaynotreflectrecentorfuturedevelopmentsoftheseactivities.SociétéGénérale–ForestpolicySociétéGénéralediscloseddetailsabouttheir2022industrialagricultureandforestrysectorpolicy,outlininghowitplannedtoengagecompaniesinthepalmoilandSouthAmericansoyandcattlesectorstodecoupletheproductionofsoftcommoditiesfromdeforestation:Themaindriverofdeforestationandforestdegradationistheexpansionofagriculturalland.Admittingtheinadequacyofpreviousinitiativestofightdeforestation,individualandcollectiveeffortsmustbepursuedtoacceleratethedecouplingofsoftcommoditiesproductionfromdeforestation.TheGroupiscommittedtoprogressonthispath.Targetingfulltraceabilityispartofthesolution.TheGrouprecognizesthatnotallitsclientshave100%traceabilityovertheirsupplychainsatthedateofpublicationofthispolicy,butitrequiresthatallofthemworktowardsthisgoal.Assuch,frompublicationofthispolicyuntiltheendof2022,theGroupwillengagewithitsexistingcorporateclientsthatareactiveinthemostsensitivesectors,asregardsdeforestation(palmoilandSouthAmericansoyandcattlesectors),toassesstheirstrategiestotackledeforestation.Afterthisdate,theGroupwillonlyprovidefinancialproductsandservicestoclients:{Committedtodeforestation-andconversion-freeactivities(ownoperationsandsupplychain).{Committedtoestablishandsystematizetraceabilityintheirvaluechainandabletoreportprogressintermsofscopeofimplementationand/orpercentageofachievementonanannualbasis.Inaddition,andfromthepublicationdateofthispolicy,theGroupwillrefrainfromonboardingprospectcompaniesactiveinpalmoilorSouthAmericansoyandcattlesectorsthatarenotcommittedtodeforestation-andconversion-freeactivities(ownoperationsandsupplychain)norcommittedtoestablishandsystematizetraceabilityintheirvaluechain.36CDPFinancialServicesReport2023Agrowingnumberofbanks(53%)arestartingtoincludeclimate-relatedcovenantsinsomeoftheirfinancingagreements.Anemerging23%ofbankshavestartedincludingforest-relatedcovenantsand21%havesomecovenantsrelatedtowater.Mostoftheirassociatedcreditandlendingpoliciesarefocusedontheclimate-relatedimplicationsonthedirectoperationsoftheirclients.Examplesoftheserangefromcovenantsforsyndicateloansinco-operationwithotherfinanciers,toutilizingtheGreenBondPrinciplesorGreenLoanPrinciplestoidentifystandardizedrequirementsonaborrower/issuer’ssustainabilityperformance,forthemargin/coupononasustainability-linkedloanorbond.Theseareusuallytailoredonacase-by-casebasis.Figure6:Covenantsimplementedbybanks53%23%21%ofbanksarestartingtoincludeclimate-relatedcovenantsinsomeoftheirfinancingagreements.ofbankshavestartedincludingforest-relatedcovenants.ofbankshavesomecovenantsrelatedtowater.Yes(watersecurity)Yes(forests)Yes(climate)No,butweplantowithinthenexttwoyearsNo,butwedonotplantointhenexttwoyearsBlank53%23%21%26%32%20%24%Climate21%22%4%Forests21%32%Watersecurity37CDPFinancialServicesReport2023EngagementFIsarefocusingtheirengagementsonclientsexposedtogreaterclimate,forests,and/orwater-relatedrisks,ornon-targetedengagementswhichimplementthepolicyframeworksdetailedabove.Weseethattheaimofthesepoliciesgenerallybeingtoeducateclients,enablingandincentivisingchangestotheirclientbehavior.ThisreinforcestheimportanceofFIsincatalyzingrealeconomychange,inthiscasebycreatingcapacityintherealeconomytounderstandandaddressmaterialenvironmentalrisksandopportunities.TypesofengagementCCFWEducation/informationsharing56%42%35%Engagement&incentivization(changingclientbehavior)33%37%46%Collaboration&innovation20%10%13%Informationcollection(understandingclientbehavior)16%Compliance&onboarding10%Other6%11%10%Table5:Primarytypesofclient-relatedengagementsShareholders’votingrightsatAnnualGeneralMeetings(AGMs)cansendclearsignalsoftheirprioritiesonclimateandnature-relatedissues,includingproposalsforsettingemissionsreductiontargets,enhancingclimateriskdisclosure,orintegratingnature-relatedconsiderationsintocorporatestrategies.Theserightsareparticularlyimpactfulastheywouldservebothasaclearsignalandasaharmonizingforcegiventhebroadscopeandreachofmostfinancialinstitutions.Shareholdersareyettofullyexercisetheirvotingrightsonenvironmentalissuesoutsideofclimate.38CDPFinancialServicesReport2023ThisgaprepresentsamissedopportunityforFIstooutlinetheirexpectationsofcompanies,andinfluenceandadvocateforgreateractionfromcompaniesonclimateandnature.Figure7:Organizationsexercisingvotingrightsasshareholdersonclimate,forests,and/orwater-relatedissuesVotingpracticesshouldbecomplementarytothepoliciesnotedaboveand,asabestpractice,FIswilloutlinetheirintentionsandexpectationsofcompaniesinadvance.However,atpresent,agapexistsasshareholdersareyettofullyexercisetheirvotingrightsonenvironmentalissuesoutsideofclimate.100020406080ClimatechangeForestsWatersecurityYesNo,butweplantowithinthenexttwoyearsNo,butwedonotplantointhenexttwoyears75%40%14%28%32%39%28%33%6%39CDPFinancialServicesReport2023PolicyengagementOftentimes,FIscitetheneedforpoliciesbyregulatorsandgovernmentstosupporttheminintegratingenvironmentalissuesortoenablerealeconomycompaniestocompetitivelymitigateenvironmentalriskandrealizeopportunities.Despitethis,notallFIsengagewithpolicymakers,with81%ofFIsengagingwithpolicymakersonclimatechange,whilst26%and23%dosoonforestandwater-relatedissues,respectively.ManyFIsthatdonotcurrentlyengageonforestsand/orwatercitedthattheprimaryreasonforthiswasthattheyseetheseissuestobeimportant,butnotanimmediatepriority.ThisisincontrastwiththehighlevelsofengagementonclimatechangeandunderscoresthecapacitygapwithinFIstounderstandandaddresstheinterconnectedchallengesofclimatechangeandnatureloss.Mandatoryclimate-relatedreportingregulationwasinthetopthreefocusareasforFIs’directengagementswithpolicymakers(alongwithadaptationandresilience,andsustainablefinancepolicies),whileamuchsmallernumberofFIsdirectlyengageonreportingregulationsconcerningforestsandwater.However,someFIs(231)areengaginginactivitiesthatcanindirectlyinfluencepolicies,lawsorregulations(e.g.,throughalliances,tradeassociationsorfundingorganizations/individuals)beyondclimatechange,thatmayimpactforestsandwatersecurity.Table6:mostcommonformsofengagementinactivitiesthatcoulddirectlyorindirectlyinfluencepolicy,law,orregulationthatmayaffectclimatechange,forests,andwatersecurityClimateForestsWatersecurityYes,weengagedirectlywithpolicymakers2423029Yes,weengageindirectlythroughtradeassociations3345852Yes,weengageindirectlybyfundingotherorganizationswhoseactivitiesmayinfluencepolicy,law,orregulationthatmaysignificantlyimpacttheclimate/thisissuearea1382827Noorleftblank96274284TotalpresentedwithQ(exclQNA)51636837181%26%23%ofFIsengagingwithpolicymakersonclimatechange.doso,respectively,onforest-relatedissues,andButonlyrelatedtowater.40CDPFinancialServicesReport2023EngagementcasestudiesThisstatementissignedbyinvestorswithoverUS$3trillioninassets.Westandatacrossroadsinwhichfinanceandgovernmentleadersworldwidehavethepowertoraiseambitionandaccelerateactiontotacklethewatercrisis.Theglobalwatercrisisisasystematicfinancialrisktonearlyalleconomiesandtheclimatecrisismultipliesthesethreats.2.3billionpeoplecurrentlyliveinwaterstressedareas,andsince1970,wehaveexperiencedadramatic84%declineinfreshwaterbiodiversity.InMay2022,aninternationalteamofresearchersledbytheStockholmResilienceCentreandPotsdamInstituteforClimateImpactResearchfoundthattheplanetaryboundaryforfreshwaterhasnowbeentransgressed,posing“athreattolifesupportsystemsonEarth”.InAugust2021,theIPCCissueda“coderedforhumanity”:itsSixthAssessmentReport(AR6)wasastarkwarningthatdisastroustippingpointsarenearing,andthaturgentsystem-wideactionisneedednowtoincreaseresilienceandreducevulnerabilityofwaterresources,relatedecosystems,communitiesandtheeconomytotheeffectsofclimatechange.OpenLettertoGovernmentsontheWaterCrisisWatercrisis-PolicyengagementIn2022,investorswithoverUS$3trillioninassetssignedanopenlettertogovernmentsfromCDP,toenablerobustactiononwaterandstepuptheircollectiveresponsetothewatercrisis.Thisincludedcallstoactiononwatertargetsandpathways,aswellasmandatorywaterdisclosurerequirementsandtheimplementationofsuitabledomesticpolicies.AsFIsmakestridestowardincorporatingclimate-relatedrisksintotheirstrategies,effortsareunderwaytodothesameforforestsandwatersecurity.TheimplementationofeffectivestrategieswillsupportFIstomakeclimateandnature-informedstrategicdecisions,therebybolsteringtheirprioritytomaintainfinancialperformance.41CDPFinancialServicesReport2023750xgreaterthanoperationalemissions.FinancedemissionsareonaverageoverMetricsandtargetsDisclosureofclimate-relatedportfolioimpactmetricshasrapidlymainstreamed,includingforward-lookingmetricsusedforriskmanagement.Thisisinpartdrivenbyassociatedreportingrequirements,fromtheTCFDandclearguidancefromthePartnershipforCarbonAccountingFinancials(PCAF).Climate-relateddisclosuremetrics–financedemissionsFIsareincreasinglymeasuringtheirportfolioimpactsandfinancedemissionsinparticular.{66%ofFIsmeasuredtheirportfolioimpactsin2022,upfrom51%in2020.Similarly,219FIs(39%)disclosedafigurefortheirabsolutefinancedemissionsin2022,upfrom84FIs(25%)in2020.Ofthe219FIs(39%)thatdisclosedabsolutefinancedemissionsstatistics,whencomparingthosefigurestotheirreportedoperationalemissions(thesumoftheirscopes1,2,andcategories1-14ofscope3),thedatapresentsastrikingcomparison:financedemissionsareonaverageover750xgreaterthanoperationalemissions.ThisdivergencebetweenfinancedandoperationalemissionshighlightstheprofoundenvironmentalimpactofFIs’financingactivities.Thisdatapointvariessignificantlybyregion.ForFIsheadquarteredinEurope(109FIs),financedemissionsaremorethan250xgreaterthanoperationalemissions,risingtoover270xforAsiaPacific(66FIs),whilstforNorthAmerica(26FIs)itisover11,000xgreater.Althoughthesizeofthedisclosingfinancialinstitutionsintheseregionsplayssomepartinexplainingthis,thereisgenerallyadisparityinthequalityofreportedfinancedemissionsthatneedstobeaddressed:{Reportedemissionsfiguresareoftennotaccompaniedbyexplanationsoftheextenttowhichrequirementsandrecommendationsofmethodologiesinfluencedtheircalculations.442CDPFinancialServicesReport202379%oftheFIsdisclosingfinancedemissionsthroughCDPreferencedPCAFastheirchosenmethodology.{Keysectorsandassetclassesaresometimesexcludedfromfinancedemissionscalculations.{Thequalityandassumptionsoftheunderlyingdataarenotalwaysdisclosed.Thisincreaseinthe700:1ratioreportedin2021islargelyduetoimprovementsintheunderlyingcalculations,bothintermsofenhanceddataqualityandwideruseoftherobustPCAFdevelopedmethodology.PCAFismadeupofover380FIsignatoriesrepresentingoverUS$89trillionincombinedassetsthathavecommittedtoassessinganddisclosingtheirportfolioimpacts,includingfinancedemissions.OftheFIsdisclosingfinancedemissionsthroughCDP,79%(173of219)referencedPCAForitsGlobalGHGAccountingandReportingStandardfortheFinancialIndustryastheirchosenmethodology,indicatingthesignificantuptakeofPCAF’sStandardacrosstheindustry.Delvingfurtherintothequestionofdataquality,12%ofFIs(66outof556)disclosedthattheyhadsomelevelofverificationfortheirportfolioimpactmetricsorfinancedemissionscalculations.Inalmostallcases,thiswaslimitedassuranceofthestatisticswith37oftheseFIsbeingassuredinlinewiththeISAE3000standardseries.Otherstandardswerealsoused,suchasISO14064(9FIs),AA1000AS(5FIs)andASA3000(5FIs).Infuture,greaterscrutinyfromauditorsintothequalityofthesereportedfigureswillbecriticalinestablishingacomparablebaselineacrossinstitutions.Additionally,therewillbeincreasinglystringentrequirementsofkeyassurancestandardsetters,ifthesearetobeusedtodeterminewhetherFIsareontracktomeettheirportfoliotargets.43CDPFinancialServicesReport202332%ofFIsplantomeasuretheirportfolioimpactforforestsorwatersecuritywithinthenexttwoyears.Nature-relateddisclosuremetricsDisclosureofnature-relatedportfolioimpactmetricsforFIsremainsnascentintheabsenceofclearguidanceontoolsandmethodologiestouse.11%ofFIscurrentlymeasuretheirportfolioimpactforforestsorwatersecurityand,encouragingly,anadditional32%plantodosowithinthenexttwoyears.Ofthosethatarecalculatingtheirportfolioimpactmetrics,weseethatsomeleadingFIsareusingbespokemethodologies–forexample,calculatingtheirfinancedwaterfootprints(includingwaterwithdrawals,treatments,orwateravoidedasinthecaseofWHEBAssetManagementandImpactAssetManagement)orassessingthetotallandundersustainablemanagement.Inothercases,regulationisbeginningtodrivethecalculationofwaterandbiodiversity-relatedimpacts,suchasEUSFDRregulationtodiscloseagainstrelevantPrincipleAdverseImpactindicators.Inotherinstances,impact-orientedinvestmentsarebeingdisclosed,suchastheForestResilienceBondmanagedbyBlueForest,whichdeploysprivatecapitaltofinanceforestrestorationprojectsforwildfireprevention.CSAAInsuranceGroupwasoneofthefirstinvestorsintheForestResilienceBond.Atpresent,someFIsthatdisclosenature-relatedportfolioimpactsareconflatingthemwithdependencyandriskmetricsi.e.,theirexposuretosectorswithdependenciesorrisksstemmingfromnature.DisclosingFIsoftendisclosedependency-relatedexposuremetrics.However,thefocusshouldbeonindicatingapreciseamountoffinancingtowardscompanieswithpositiveornegativeimpactsonnature(arevenue-basedimpactmetric),oranature-basedfootprintmetric(thetypesofimpactmetricssuggestedbytheTNFDintheirthirdbetarelease9perthetablebelow).Thisindicatesaneedforcapacitybuilding,particularlyinthemovetowardsdisclosuremetricsthatgobeyondrisksandopportunities,tocomprehensivelyassessnature-relateddependenciesandimpacts.9https://framework.tnfd.global/wp-content/uploads/2022/11/TNFD_Framework_Annex_3-4_v0-3_A.pdf44CDPFinancialServicesReport2023Source:TNFDBetav0.3,CategoriesofillustrativeassessmentanddisclosuremetricsforfinancialinstitutionsMetrictypeCategorySub-categoryDependencyPotentialdependencyExposuretosectorsorfirmswithmaterialdependenciesonnatureImpactPotentialimpactFootprintbasedRevenuebasedRiskPhysicalriskExposuretophysicalrisksTransitionriskExposuretotransitionrisksRiskmeasuresImpactsonspecificriskparameters(e.g.expectedloss)ValueatriskValueatrisk(VaR)OpportunityExposuretonature-relatedopportunitiesVolumeoffinancialflow(investment,lending,insurance)withcompaniesorsectorswhereactivitiesaredeemedtohavematerialexposuretonature-relatedopportunityMitigationofnature-relatedriskVolumeoffinancialflow(investment,lending,insurance)withevidenceofmaterialmitigationofnature-relatedrisk(e.g.engagement,duediligence,sustainabilitylinkedKPIs)NaturepositivesolutionsVolumeoffinancialflow(investment,lending,insurance)withdemonstratedpositiveimpactsonnatureTable7:Overview-Categoriesofillustrativeassessmentanddisclosuremetricsforfinancialinstitutions45CDPFinancialServicesReport2023PBAFPlanneddevelopmentsbyPBAFandguidancefromtheTNFDwillbecriticaltosupportandenableFIstoassesstheirimpacts,andtoprovideguidancethatlendsitselftocomparabilityandharmonizationacrosstheapproachestakenbyFIs.ThePBAFStandardhasbeenupdatedin2023toprovideguidanceonportfolioassessmentsofdependenciesonecosystemservices,includingrecommendationsforfinancialinstitutionsanddataproviders.AnupdateontheotherpartsofthePBAFStandardwillfollow.OfthoseFIsthatprovidedreasonsfornotcurrentlydisclosingforestsorwater-relatedimpactmetrics,asignificantnumbercitedthelackofavailabletoolsormethodologies.PrimaryreasonForestsWatersecurityImportantbutnotanimmediatepriority127FIs(52%)128FIs(55%)Lackoftoolsormethodologiesavailable52FIs(21%)52FIs(22%)Other65FIs(27%)54FIs(23%)Total244FIs234FIs46CDPFinancialServicesReport2023TargetsettingTargetsettingisacriticalaspectofthetransitiontonet-zero.ThemostimportanttargetsforFIsarethosethatcovertheirportfolios,asthisisthelargestsourceoftheiremissionsandenvironmentalimpact.However,settingtargetsremainsaserioushurdleformanyFIs.Only29%(159FIs)havesetportfoliotargetsforclimatechange,whiletheremainingmajorityfocussolelyonreducingtheiroperationalemissions.Amongthosesettingtargets,only11%(59FIs)ofthosesettingportfoliotargetsarecommittedtoorhavesecuredvalidationfromtheScienceBasedTargetsInitiative(SBTi).Theuseofvariousmethodologiesandframeworksfortargetsetting,suchasSBTi-FI,theNetZeroInvestmentFramework,theParisAgreementCapitalTransitionAssessment(PACTA),andtheprotocolsoftheNetZeroAssetOwnerAllianceandNetZeroBankingAlliance,hasledtofragmentationanddifficultiesincomparingambitionandprogressacrossinstitutions.AnalysisofthedataindicatesnoticeableimprovementsinFIs’reportingontheirfinancedemissions.However,thereisstillconsiderablegroundtocoverasonlyaminorityofFIshavesetportfoliotargetsaddressingclimatechange.MeasuringanddisclosingemissionsassociatedwithfinancialactivitiesisanimportantfirststepforFIsinmanagingrisksandidentifyingopportunitiesinthetransition.Figure8:Didyouhaveanemissionstargetthatwasactiveinthereportingyear?LeftthequestionblankNotargetsOperationaltarget(s)OnlyPortfoliotargets(committedtoorhavesecuredvalidationfromtheSBTi)46%23%2%29%47CDPFinancialServicesReport2023ThekeytopicsaddressedbytheSBTiintheirupdatesinclude:DefiningwhatitmeansforanFItoreachastateofnet-zeroattheportfoliolevel,andtheconceptualframeworktoestablishbothnearandlong-termtargets.Anexpandedapproachtocoverage,introducingmaterialityandclimaterelevanceprinciplestobetterdefinehowdifferentfinancialassetclassesshouldbeaddressedovertime.Targetambitionisexpectedtobedefinedacrossallassetclasseswithinaportfolio-widetargetboundary,ratherthanonanasset-by-assetbasis,andFIswillhavetheflexibilitywithinthisboundarytofocusonkeyportfoliosthathavethegreatestimpactongreenhousegas(GHG)emissions,incorporatingkeymilestonesthatareclearlysetoutontheroadtonet-zero.EstablishingneutralizationcriteriatodefinehowanFIcaneliminateresidualportfolioemissionsandunderwhatconditionsanFIcanmakeanet-zeroclaim.A“maturityscale”approachisintroduced,toreflectthedifferentapproachestoassessingalignmentofanFI’sportfolioovertime.TheintroductionofcompulsorycriteriarelatedtoanFI’sfossilfuelfinanceactivity,thekeyhighGHG-emittingsector.TheSBTi’sFINetZeroStandarddraftcriteriaonportfoliotargetboundariesalsorequiresinclusionofscope3emissionsforForest,LandandAgriculture(FLAG)sectorportfoliocompanies,therebyaimingtoaddressemissionsstemmingfromlandusedegradationanddeforestation.TheSBTiFinanceSectorframework,whichisbeingupdatedthrough2023andbeyond,alongwiththeirNear-TermtargetsettingframeworkandanewFINetZeroStandard,acknowledgessomeofthesechallenges,whiletheirupcomingframeworksreferencetheGFANZnet-zeroinitiativestoenableinteroperability10.ScienceBasedTargetsinitiative–FINetZeroStandard10https://sciencebasedtargets.org/blog/evolution-of-the-sbti-finance-sector-framework48CDPFinancialServicesReport2023CDPisafoundingpartneroftheScienceBasedTargetsNetwork(SBTN),theorganizationmanagingdevelopmentofscience-basedtargetsfornatureforcompanies.SBTNandscience-basedtargetsfornatureTobuildupontheincreasingcommitmentsofFIstonotonlydisclosenature-relatedimpactsanddependencies,butalsosettargets,theSBTNisalsodevelopingaSBTforNature-focusedfinancesectorengagementstrategy.TheSBTNarealsoacoreknowledgepartneroftheTNFD,andthetwoinitiativeshaveworkedtogethertopublishjointguidanceforcorporatessettingscience-basedtargetsfornature.Inthemeantime,onnature-relatedtargetsetting,CDPrecommendsthatFIs:{Encourageportfoliocompaniestosetscience-basedtargetsfornatureand/orcompleteaTNFDLEAPassessment.{RefertotheFinanceforBiodiversityreport,reviewingsectorsthatarehighlyimpactfulsectorsonbiodiversity.{RefertotheWorldEconomicForum’sreport,reviewingsectorsthatarehighlydependentonbiodiversity.{UsetheENCOREtoolfromCapitalCoalitiontosupportinitialportfolioevaluationsofimpactsanddependencies.Tofurtherenablethedisclosureofenvironmentaltargetsbeyondclimatechange,CDPhasintroducedquestionFW-FS3.3ain2023,allowingFIstodisclosetargetsfordeforestation-freeand/orwater-securefinancing.ThisdevelopmentrepresentsacrucialopportunityforFIstodemonstratetheircommitmenttosustainabilityintheirfinancingactivities.Thereisalsoaneedforincreaseddataquality,dataavailability,andtarget-settingmethodologies,acrossallassetclassesandsectors.Thistaskwillrequirecross-sectorcollaborationledbyleadinginitiativesanddataproviders,withinputfromfinancialinstitutions,toavoidfragmentationinapproachesandlearnfromtheprocessesthathavetakenplacesofarintheclimatemetricsandtargetsspace.49CDPFinancialServicesReport2023MovingforwardCDPisfeedingintothesystemfromvariousangles,inordertosupportthesystem-widechangesneededfordisclosureandactiononenvironmentalissues,by:{Developingprinciplesofhigh-qualitymandatorydisclosuretoguidepolicymakersindesigningcomprehensive,high-quality,andcoherentenvironmentaldisclosurepolicies,goingbeyondclimatetocoverwiderenvironmentalimpacts.Thissupportsglobaleffortstomakecorporatereportingonnature-relatedissuesastandardbusinessnormandenshrinedinpolicy.{Continuingtosupportthedevelopmentofstandardsandframeworkspertainingtothenaturedisclosureecosystem,inordertoworktowardsinteroperabilityacrossinitiativesandsupportcorporatestodevelopthecapacitytodiscloseinlinewithleadingpractice.CDPisproudtobesupportingtheTNFDasaKnowledgePartner,puttingourwealthofinsights,dataandexpertiseatitsdisposal.CDPisalreadyplayinganactiveroleinusingitsdatatoinformTNFDdevelopmentandwhentheTNFDisfinalizedCDP’sglobaldisclosureframeworkisideallypositionedtomainstreamthewidespreadadoptionofTNFDrecommendationsinastructured,comparableformat,asCDPdidfortheTCFD.EngagingwithCDP’sCapitalMarketsSignatoryProgramallowsFIstofindoutmoreabouthowto:{ReportinlinewiththePCAFstandardandutilizeCDP’sFullGHGEmissionsDatasetwhichincorporatesPCAFDataQualityScores.a.CDPandPCAFwillcontinuetoexploreopportunitiestostreamlinethereportingofportfolioimpactmetricsthroughCDP’sFinancialServicesquestionnaire.HowCDPisdrivingprogressfornatureForover20years,CDPhasbroughttogetherFIstofacilitateengagementwithcompaniesonanindustrialscale.50CDPFinancialServicesReport2023{UsedisclosuredatafromrealeconomycompaniesonforestsandwaterthroughCDP,tobeginassessingportfolio’sexposuretorisksandassessments.a.CDPwillcontinuetoworkwithourdiscloserstosupportthemtotransparentlydiscloseonbiodiversityandnaturemorebroadly,aswehavedoneonclimate,forests,andwater.b.CDPconductsforest-relatedportfolioassessmentsforFIsusingourdisclosuredata,supportingthemtounderstandthecurrentstrengthsandareaforimprovementforcompaniesintheirportfolios.Forover20years,CDPhasbroughttogetherFIstofacilitateengagementwithcompaniesonanindustrialscale.CDPengageswithFIsinavarietyofways,includingthroughtheCDPFinancialServicesquestionnaire.Toengagewithcompanies,reducerisks,andidentifyopportunities,FIscanaccessdatafromcompaniesonclimatechange,forestsandwatersecurity,throughCDP’sinvestorsignatoryprogram.Tofindoutmoreabouttheprogram,pleasecontactyourCapitalMarketsaccountmanagerorgetintouchwithourCapitalMarketsteamviainvestor@cdp.net,ifyouarenotyetaCDPCapitalMarketssignatory.51CDPFinancialServicesReport2023Thisgradualtransformationdemonstratesappetitefromfinancialinstitutionsandotheractorswithincapitalmarketstobuildagreenandresilientfinancialsystem.However,achievingthesegoalsandlimitingwarmingto1.5°Crequires,asafirststep,arecognitionthatclimateandnatureinentiretyareintrinsicallylinked,andassuchhaltingandreversingnaturelossmustoccuralongsidecorporateeffortstomitigateclimatechange.Thisreportassessestheinitiallevelofactiononclimatechangeandnaturebytheglobalfinancesector,drawinginsightsfromclimatechange,forests,andwatersecuritydatareportedbyfinancialinstitutionsthroughCDPin2022.Whilenearly95%ofFIs’businessstrategiesorfinancialplanningarenowinfluencedbyclimatechange,lessthan30%areinfluencedbyforestissuesandwatersecurity–anindicationthatconsiderationofnatureisnotyetapriorityformost.However,someFIsarebeginningtoconsidernature-relatedissues.Whilefinancialinstitutionsremainlargelyblindtotherisks,theyacutelyfocusontheopportunitiesassociatedwithgreenfinancingsolutionsonbothclimatechangeandnature.Yet,momentumisbuildingtoprotectnatureandaddressenvironmentalissuesholistically.EffortsareunderwaytotranslatethegoalsoftheGlobalBiodiversityFrameworkintopolicyandregulatorychangesworldwide.Thiswillincludeintroducingreportingrequirementsonnatureforfinancialinstitutions,likelyinlinewiththeTaskforceonNature-relatedFinancialDisclosures(TNFD)recommendations.Financialinstitutionsthataretakingstepstoidentifyandassessmaterialrisksandaredisclosingtheirimpact,dependencies,risksandopportunitiesrelatedtoclimateandnature,willbebetterpositionedtogetaheadofupcomingreportingrequirements.Toaccelerateprogress,actionisrequiredofallstakeholdersacrossthefinancialecosystem.Financialinstitutionsmustfirstrecognizethattheirresponsibilitytodemandcredible,comprehensive,andtimelydataisakeycomponentindeterminingthedirectionofchangewithinthefinancialsystem.Todrivethetransformation,itisnecessarythatFIsadoptanintegratedapproachthatweavesnatureacrossgovernance,ConclusionTheenvironmentalreportinglandscapehasseensignificantshiftsovertheyears,drivenbyfactorsincludingcurrentstandardsliketheTCFDandemergingregulations.52CDPFinancialServicesReport2023riskmanagement,strategyimplementation,metrics,andscience-basedtargetsetting,inadditiontoengagementefforts.Governments,regulators,supervisors,andstandardsettersalsoplayacrucialroleincatalyzingchange,throughstreamliningintegrateddisclosurerequirements,enhancingtransparencyandaccountability,inadditiontoharmonizingstandards.Foritspart,amongothercontributions,CDP’sexpandedquestionnaire,whichincludesnature-relatedissues,ispreparingFIsforforthcomingdisclosurestandardsandempowersthemtotakestepstounderstandandmanagetheircorporateimpacts,risksandopportunitiesassociatedwithlanduse,forestry,watersecurity,andbiodiversity.Financialinstitutionsmustprioritizeassessmentofnature-relatedrisks,opportunitiesandimpacts,andintegratethemintodecision-makingprocessesalongsideclimatechangeconsiderations.OnlythroughstrongleadershipbyFIs,enabledbyactionfromgovernments,regulatorsandstandardsetters,canthesectortransitiontowardachievingasustainableandnature-inclusivefinancialsystemthatsafeguardsourplanet’sfuture.Throughunwaveringcommitmentandconcertedefforts,financialinstitutionscancatalyzecapitalreallocationinawaythatprotectsandrestoresnature,andboosttheirownresiliencealongtheway.53CDPFinancialServicesReport2023AuthorMediaenquiriesFormoreinformation,pleasecontact:investor@cdp.netAcknowledgementsAboutCDPCDPisaglobalnon-profitthatrunstheworld’senvironmentaldisclosuresystemforcompanies,cities,statesandregions.Foundedin2000andworkingwithmorethan740financialinstitutionswithover$130trillioninassets,CDPpioneeredusingcapitalmarketsandcorporateprocurementtomotivatecompaniestodisclosetheirenvironmentalimpacts,andtoreducegreenhousegasemissions,safeguardwaterresourcesandprotectforests.Nearly20,000organizationsaroundtheworlddiscloseddatathroughCDPin2022,includingmorethan18,700companiesworthhalfofglobalmarketcapitalization,andover1,100cities,statesandregions.FullyTCFDaligned,CDPholdsthelargestenvironmentaldatabaseintheworld,andCDPscoresarewidelyusedtodriveinvestmentandprocurementdecisionstowardsazerocarbon,sustainableandresilienteconomy.CDPisafoundingmemberoftheScienceBasedTargetsinitiative,WeMeanBusinessCoalition,TheInvestorAgendaandtheNetZeroAssetManagersinitiative.Visitcdp.netorfollowus@CDPtofindoutmore.CDPContributions:DISCLOSUREINSIGHTACTIONAnalysis&InputManveerGillSeniorManagerSustainableFinance,ClimateChange(ledby)TeodoraKaevaTechnicalManager,FinancialServicesSamRouseSeniorTechnicalOfficer,FinancialServicesJoshuaBryantSeniorAnalyst,WaterSecurityKumarBhattacharyyaSeniorProjectOfficer,ForestsStevenGunawanManager,SustainableFinanceClaireElsdonGlobalDirectorRequestingAuthorities-CapitalMarketsAmirSokolowskiGlobalDirector,ClimateChangeThomasMaddoxGlobalDirector,ForestsandLandChristianLonnqvistManagerFinancialServicesSebastianO’ConnorAssociateDirector,UKCapitalMarketsEvanGuySeniorGlobalPolicyManagerTatianaMasmelaLead-ExternalAffairsVieraUkropcovaManager,ForestsToyosiAdebayoSeniorCommunicationsManager,CapitalMarketstoyosi.adebayo@cdp.net©CDP2023MoniqueEwertonSeniorOfficer,CapitalMarketsEngagementPatriciaCalderonAssociateDirector,WaterSecurityDorianFougeresSeniorNatureLeadBenRobinsonMonitoringEvaluationLearningLeadHenryFogartySeniorContentandBrandManagerEmilyPeddleContentandBrandSeniorExecutiveJennyHollowayCommunicationsExecutive

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