Marek Reuter (EDHEC): "Achieving the TCFD’s vision of risk transparency is far more complex than it might appear"

The financial world has always been at the heart of societal transformation. From funding industrial revolutions to fueling digital advancements, capital allocation has played a pivotal role in shaping our collective futures. Yet, as the world faces an unprecedented climate crisis, a new wave of finance has emerged—sustainable finance. This field promises to align profit with purpose, ensuring that economic growth is pursued within planetary boundaries.

This promise hinges on translating environmental, social, and governance (ESG) challenges into financial risks. Frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) are designed to operationalize this vision, promoting risk transparency as a catalyst for change. But how effective is this approach? Is it feasible—or even desirable—to channel sustainability through the lens of financial risk?

In this interview, Marek Reuter, Assistant Professor at EDHEC, shares insights from his paper, "Symbol or Substance? Scrutinizing the ‘Risk Transparency Premise’ in Marketized Sustainable Finance: The Case of TCFD Reporting." (1) He examines how TCFD’s ambition to embed sustainability into financial systems has been both transformative and fraught with challenges. From uneven adoption to organizational roadblocks, his research raises critical questions about the future of sustainable finance.

Let us start with some history. Sustainability finance is now often associated with markets and profit-driven initiatives, but has it always been this way?

Marek Reuter: That is a good starting point. The idea of sustainability finance is not entirely new. But how the idea is implemented has indeed evolved significantly over the decades. In the 1960s and 1970s, it was primarily rooted in progressive ideals, often driven by advocacy groups or religious organizations. Back then, the focus was on socially responsible investment (SRI), targeting issues like civil rights, labor conditions, and environmental protection. These efforts were more about social justice than market returns.

Fast forward to the 2000s, and we see a shift towards what many now term "marketized" sustainable finance (2). The field became dominated by institutional investors and specialized ESG funds, aligning more with financial markets. Today, sustainability finance is deeply intertwined with risk assessment and capital allocation—a reflection of its financialization.

Speaking of risk, translating sustainability problems into risks seems central to modern sustainable finance. Could you unpack this idea?

MR: Absolutely. At the core of this shift lies the idea that societal and environmental challenges, like climate change, are not just moral or ecological concerns but also financial risks. For example, climate change can disrupt supply chains, devalue assets, or lead to regulatory penalties (3). By framing these challenges as risks, they become quantifiable and actionable within financial systems.

The underlying assumption here is what we name in our paper the "risk transparency premise": the belief that if companies measure and disclose these risks clearly, investors, insurers, and other market actors can make better decisions. In other words, impacts that firms have on the environment are no longer seen as externalities but are instead internalized by the market, which is expected to channel capital toward sustainability goals. The TCFD framework is a prime example, encouraging firms to identify and disclose how climate risks affect their operations (4).

What are the pros and cons of this approach? Translating sustainability into risk must have its advantages, but also some pitfalls.

MR: Definitely. On the positive side, framing sustainability challenges as risks integrates them into mainstream decision-making processes. It compels businesses and investors to take these issues seriously, potentially driving significant capital toward sustainability goals. It’s a pragmatic way to mobilize market forces for social and environmental ends.

However, there are also drawbacks. One major concern is that this framing can narrow our focus. By prioritizing risks to the firm—rather than broader societal or environmental harms—we may overlook important dimensions of sustainability.

Another challenge is the assumption that these risks can always be quantified and expressed in monetary terms. Many climate-related impacts are deeply uncertain and systemic, making them difficult to capture through conventional financial metrics. This not only risks creating narrow understandings of sustainability or fostering superficial reporting and greenwashing, but also highlights how companies often struggle to provide credible quantifications or offer accounts that investors can trust.

Your paper (1) scrutinizes the TCFD’s "risk transparency premise." What did you find about how well firms are adopting this framework?

MR: Unfortunately, our findings were a bit sobering. Despite strong institutional support for the TCFD framework, adoption and compliance remains lacking. We analyzed the climate risk disclosures of European financial sector firms – an important group of early adopters – and found that while compliance has improved since the TCFD’s launch in 2017, significant gaps persist. The "Strategy" pillar of the TCFD, which includes forward-looking assessments like scenario analyses, remains particularly weak. Firms, indeed, often struggle to provide hard, verifiable data in these areas.

We also conducted interviews with practitioners to understand the organizational challenges underlying these gaps. Three key impediments emerged: inadequate information systems, siloed professional expertise, and transparency dilemmas. These issues suggest that achieving the TCFD’s vision of risk transparency is far more complex than it might appear.

Could you elaborate on those organizational challenges? Why are they so “sticky” and difficult to resolve?

MR: Certainly. First, as of today, the information systems in many firms are simply not equipped to handle the complexity of TCFD reporting. Traditional accounting systems focus on financial data, whereas climate risk data often involves qualitative, uncertain, and cross-disciplinary information. Developing systems to integrate these diverse data types is no small task.

Second, TCFD reporting requires collaboration across professional domains—environmental specialists, accountants, risk managers, and executives. Yet, in many organizations, these groups operate in silos, with limited interaction. These groups also often lack a common “language” and might work toward differing objectives and ideals. Bridging these divides demands not just new processes but deep-seated cultural and organizational change.

Finally, there’s the issue of transparency. Many firms seem to be reluctant to disclose climate risks fully, fearing negative market reactions or competitive disadvantages. For example, acknowledging that a major asset is at risk of devaluation due to climate change could harm a company’s stock price. This creates a strong disincentive for open and honest reporting.

Overall, these organization-level challenges put into perspective the assumption of risk transparency that contemporary sustainable finance seems to rely upon to a great extent.

As regards contemporary sustainable finance, would you say that the glass is half full, or half empty?

MR: The current system has its flaws, but it has also brought sustainability issues into mainstream finance in a way that was pretty much unthinkable decades ago. To move forward, we need to address the systemic challenges I mentioned.

For one, regulators and standard-setters could provide more guidance on best practices for TCFD reporting, especially around scenario analysis and quantitative disclosures. There’s also room for innovation in reporting frameworks—for instance, exploring metrics that capture systemic and qualitative risks alongside quantitative ones.

Most importantly, however, we need to continue to question the underlying assumptions of marketized sustainable finance, instead of taking them for granted blindly. While risk transparency is a powerful tool, it’s not a panacea. Complementing it with broader, justice-oriented, or dialogic approaches to sustainability and accountability could ensure that we’re not just managing risks but also addressing root causes. This also involves to depart from the ideal that accounting can, and should, always provide an accurate reflection of reality.

Specifically, we need to find ways to complement premises for ‘hard’, ‘comparable’ and ‘financialized’ information with an openness also for more qualitative, narrative approaches (5) that potentially convey deeper understandings of sustainability challenges. Accounts that are created not only by a single company, but in a more dialogic manner with a broad range of stakeholders can be a good starting point in this regard.

References

(1) Roberta Di Marco, Ting Dong, Ria Malatincová, Marek Reuter, Torkel Strömsten. Symbol or substance? Scrutinizing the ‘risk transparency premise’ in marketized sustainable finance: The case of TCFD reporting (2023). Business Strategy and the Environment. Volume 32, Issue 6. Sept. 2023, pages 3027-3052. https://doi.org/10.1002/bse.3285

(2) See also Michelon, G., Rodrigue, M., & Trevisan, E. (2020). The marketization of a social movement: Activists, shareholders and CSR disclosure. Accounting, Organizations and Society, 80, 101074. https://doi.org/10.1016/j.aos.2019.101074

(3) See, notably, the work carried out by EDHEC's ecosystem in Climate Finance: https://www.edhec.edu/en/research-and-faculty/edhec-climate-finance-research

(4) See also O'Dwyer, B. and Unerman, J. (2020), Shifting the focus of sustainability accounting from impacts to risks and dependencies: researching the transformative potential of TCFD reporting, Accounting, Auditing & Accountability Journal, Vol. 33 No. 5, pp. 1113-1141. https://doi.org/10.1108/AAAJ-02-2020-4445

(5) Van der Linden, B., Wicks, A.C. & Freeman, R.E. How to Assess Multiple-Value Accounting Narratives from a Value Pluralist Perspective? Some Metaethical Criteria. J Bus Ethics 192, 243–259 (2024). https://doi.org/10.1007/s10551-023-05385-1