The financial sector is in a phase of transition. Transition is the term used to describe a major shift that needs to be managed, involving significant changes taking place within a relatively short period of time.

For several years now, there have been calls for financial institutions to place a stronger focus on physical and transition ESG¹- risks. The institutions have been integrating these risks more and more into risk models, credit pricing, portfolio management and the development of the products and services they offer, as well as into the ongoing training of their employees. This has taken an enormous amount of hard work.

This transition has not primarily been brought about by new ideas from regulators in Berlin or Brussels, but by the drastic changes taking place in our environment. Climate change is no longer an abstract concept for the coming decades; its effects in the form of extreme weather events such as heavy rain, drought and flooding are being felt now, all over the world. The drastic consequences of global warming are destroying assets in one fell swoop, rather than gradually, as in the case of an economic downturn, for example.

The financial industry has a two-fold role to play in this volatile environment. The first aspect of this role requires the industry to better assess the new climate, biodiversity and associated social risks and to price in these risks in order to secure the assets on its books now and for the future. To fulfil the second aspect of its role, the industry must, by providing investment opportunities and granting loans, support the real economy in its transformation towards a decarbonised circular economy – while respecting the earth’s restraints. This somewhat expands the industry’s role as purely a supplier of funds and an adjuster of risks, since companies expect to receive advisory support in their modernisation processes as well as financial incentives, e.g. reduced interest rates on loans for highly sustainable business models. (See Sustainable Transformation Monitor 2025).

In addition to the role they play in the market in terms of retail and corporate customers, financial institutions themselves are increasingly being called on to make their sustainability performance measurable and to be transparent in their reporting. The EU regulations certainly still need to undergo a significant review and a cost-benefit analysis at this point to ensure that the same rules create a level playing field for all the parties involved. It must be possible to comply with the regulations by means of a reasonable amount of effort, and these regulations must have a major impact on risk measurement and transformation financing.

The extremely turbulent geopolitical times we are currently experiencing are also impacting the issue of sustainability: an ESG backlash is spilling over from the US to Europe.

These days, therefore, the financial institutions are perhaps the ones with the primary responsibility for pointing out – clearly and loudly, while remaining cool-headed and fact-based – the physical and transition risks of a world that is now 1.5 degrees warmer than in the pre-industrial age.

For one thing is clear: if we fail to move forward with this transformation quickly, and if we fail to join forces with the financial and real economy in steering it, the consequences will lead to significantly greater social upheaval and economic costs than the ones we are already seeing today..

1 ESG stands for “environmental, social and governance”.