FRM Part II 2025 Spotlight: Navigating the Evolving Climate Risk Disclosure
- Kateryna Myrko
- Aug 8
- 5 min read
Climate risk disclosures have vaulted to the forefront of financial risk management, emerging as a “hot spot” in FRM® Part II’s Current Issues module. As regulators and standard-setters worldwide tighten requirements, risk managers must navigate a complex landscape of frameworks, rules, and best practices to ensure transparent reporting of physical and transition risks. This article provides a comprehensive overview of the latest developments—spanning the ISSB’s IFRS S2 standard, the U.S. SEC’s evolving rulemaking, and the EU’s CSRD/ESRS regime—alongside practical challenges, market trends, and exam-relevant insights.
1. Global Regulatory Landscape FRM Part II 2025 , Climate Risk
1.1 ISSB and IFRS S2
In June 2025, the International Sustainability Standards Board (ISSB) reaffirmed its commitment to IFRS S2 Climate-related Disclosures, effective for periods beginning on or after January 1, 2024. The ISSB’s work plan for 2024–2026 includes targeted amendments to ease application burdens—particularly around GHG emissions reliefs—and the release of Q&A educational materials on GHG Protocol alignment. FRM Part II 2025 , Climate Risk
1.2 U.S. SEC Rulemaking
On March 27, 2025, the U.S. Securities and Exchange Commission (SEC) voted 3–2 to end its defense of the 2024 climate disclosure rules requiring registrants to report climate-related risks and Scope 1/2 emissions in audited filings.
Concurrently, litigation over the SEC’s final rule is paused indefinitely by the Eighth Circuit, introducing uncertainty for U.S. filers and risk managers.
1.3 EU CSRD & ESRS
Under the Corporate Sustainability Reporting Directive (CSRD), large EU and non-EU companies must comply with European Sustainability Reporting Standards (ESRS). The latest ESRS E1 Exposure Draft refines GHG disclosure requirements across all seven Kyoto gases and mandates detailed transition-risk reporting, while the Omnibus Simplification Package may reduce datapoint requirements by up to 66 percent to ease compliance burdens.
2. Core Disclosure Frameworks
2.1 Task Force on Climate-related Financial Disclosures (TCFD)
Although voluntary, the TCFD remains the de facto benchmark for scenario analysis and governance disclosures, influencing nearly all mandatory regimes. Its four pillars—Governance, Strategy, Risk Management, Metrics & Targets—are embedded in IFRS S2 and serve as a bridge to SEC and ESRS requirements.
2.2 IFRS S2 Requirements
IFRS S2 mandates reporting on:
Governance: Board oversight of climate risks
Strategy: Scenario-based analysis of physical and transition impacts
Risk Management: Processes to identify, assess, and manage climate risks
Metrics & Targets: Quantitative GHG data (Scopes 1–3) and targets, aligned with the GHG Protocol.
2.3 SEC Final Rule (Pre-Pause)
Prior to litigation pause, the SEC’s rule required:
Disclosure of material climate-related risks affecting business strategy or financials
Quantitative disclosure of Scope 1 and Scope 2 emissions (and Scope 3 if material)
Attestation by an independent auditor for Scopes 1/2.
2.4 ESRS E1 Highlights
ESRS E1 extends beyond financial impacts to incorporate double materiality—requiring companies to report both how climate affects their business and how their activities affect the climate. It specifies granular disclosures on GHG emissions, energy use, and transition-related risks and opportunities.
3. Implementation Challenges
3.1 Data Quality and Availability
Accurate Scope 3 data remains elusive due to reliance on third-party suppliers and the lack of standardized data collection. Companies struggle with incomplete value-chain data, leading to material estimation uncertainty.
3.2 Scenario Analysis Complexity
Conducting robust scenario analysis—itself a TCFD pillar—requires forward-looking models of physical and transition risk. Integrating these outputs into financial forecasts poses methodological hurdles, including assumption selection and time-horizon alignment.
3.3 Assurance and Audit
Audit firms are still developing expertise to provide limited assurance on climate disclosures. The gap between financial audit rigor and sustainability data quality creates a risk of “greenwashing” and undermines stakeholder confidence.
3.4 Regulatory Uncertainty
The SEC’s litigation pause and pending amendments by the ISSB introduce ambiguity in U.S. and global markets. Risk managers must stay agile, monitoring court decisions and exposure drafts to adjust disclosure practices proactively.
4. Market Trends and “Hot Spots”
4.1 Transition-Risk Focus
Investors are increasingly scrutinizing transition plans—corporate strategies to decarbonize operations. ISSB guidance on transition disclosures emphasizes clear, time-bound targets and governance mechanisms.
4.2 Digital Reporting and XBRL
Regulators are moving toward digital tagging of climate data (e.g., XBRL) to enhance comparability and machine readability. The SEC and ESMA pilots for climate XBRL taxonomy signal a shift to more granular, real-time data analysis.
4.3 Regulatory Convergence
The EU and ISSB are collaborating to minimize overlaps, offering joint guidance so that compliance with one set of standards reduces burden under the other. This interoperability effort aims to align IFRS S2 with ESRS and mitigate “jurisdictional arbitrage”.
5. Implications for Risk Management
Integrated Risk Frameworks: Climate risks must be embedded alongside market, credit, and operational risks in enterprise risk management systems.
Capital Allocation: Disclosure outputs inform capital planning—e.g., stress test adjustments based on scenario results.
Stakeholder Engagement: Transparent reporting builds trust with investors, regulators, and the public, reducing litigation and reputational risk.
6. FRM Exam Relevance
FRM Part II candidates should master:
Key standards and bodies: TCFD, ISSB, SEC, ESRS.
Disclosure pillars and requirements of IFRS S2 and ESRS E1.
Differences between single materiality (financial) and double materiality (financial + environmental).
Common challenges: data gaps, scenario modeling, assurance hurdles.
Recent developments: SEC litigation pause, ISSB exposure drafts, ESRS simplification package.
Exam questions may present case studies requiring identification of appropriate frameworks, description of needed metrics, or analysis of a firm’s disclosure shortcomings.
Climate risk disclosures represent a dynamic, rapidly evolving domain in FRM Part II. From the strategic decisions of the ISSB to the legal battles in U.S. courts, and the expansive scope of EU reporting standards, risk professionals must remain vigilant and adaptable. Understanding the latest regulatory shifts, technical requirements, and implementation challenges will not only ensure exam readiness but also empower effective, transparent climate risk management in 2025 and beyond.
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