Hidden Financial Risks That Are Reshaping Corporate Valuations
Our CEO, Michele Demers, also a Forbes Council member, writes about the growing influence of “hidden” financial risks on corporate valuations. Read the full article on Forbes
For years, sustainability was viewed as a branding tool—something companies did to enhance reputation and meet stakeholder expectations. That’s no longer the case. Investors are now scrutinizing environmental impact through a financial lens, treating sustainability risks as liabilities that can erode long-term value. The shift isn’t about optics. It’s about financial exposure, investment security and the data that separates leaders from liabilities.
At Boundless Impact Research & Analytics, we track how environmental risks shape investment decisions across industries. Four financial risk areas stand out, each influencing corporate valuations in real time:
1. Legal And Regulatory Liability: Compliance Costs Are Rising
Environmental regulations are evolving rapidly, forcing companies to disclose risks they once overlooked. The European Union’s Corporate Sustainability Reporting Directive (CSRD) now requires nearly 50,000 companies to provide independently verified environmental disclosures. In the U.S., California’s climate disclosure rules have introduced similar reporting obligations, increasing legal exposure for firms unable to substantiate their sustainability claims.
The financial consequences are tangible. According to InfluenceMap, 58% of the world’s largest companies have climate commitments that conflict with their lobbying practices, raising questions about corporate accountability. These penalties don’t just hit balance sheets—they raise red flags for investors looking for long-term stability. Companies without transparent, verifiable environmental data are becoming riskier bets.
2. Insurance And Financing: Environmental Risk Is Credit Risk
Lenders and insurers are embedding sustainability into their risk models. According to CDP’s 2024 disclosure data, more than 22,700 companies across 2024 were scored for environmental transparency, indicating a surge in corporate and financial sector engagement. And while specific lending figures tied to fossil fuels were not reported, the sheer scale of disclosure suggests expanded scrutiny of financing practices.
Meanwhile, investors are reallocating capital toward businesses that can prove their sustainability efforts with science-backed metrics. According to BloombergNEF, investment in clean energy manufacturing—including battery metals, solar modules and wind components—reached $135 billion globally in 2023, nearly triple the 2020 level.
This growth reflects a prioritization of investments with measurable and verifiable sustainability frameworks, driven by increased demand for battery gigafactories and clean-tech infrastructure. Businesses relying on outdated reporting methods—or worse, vague sustainability pledges—are losing access to financing while capital flows toward companies embracing data-driven transparency.
3. Reputational Damage And Consumer Trust: The Cost Of Greenwashing
Consumers are also holding brands accountable. NielsenIQ found that 78% of global consumers prefer sustainable products, but most are skeptical of unverified sustainability claims. This skepticism drives purchasing decisions and influences long-term brand equity. Recognizing this shift, investors are pulling capital from companies that can’t provide credible data on their environmental impact.
4. Valuation And Market Position: A Harder Sell For Investors
Corporate valuations are increasingly tied to environmental performance. While global sustainable equity and bond funds faced record net outflows of $8.6 billion in Q1 2025, Morningstar reports that sustainable fixed-income funds saw inflows of $14 billion during the same quarter. Despite this volatility, thematic investment in clean energy, circular economy and climate adaptation continues to attract selective capital. This underscores a clear investor consensus: sustainability performance matters.
Investment flows reflect this reality. A 2024 MSCI survey found that 47% of asset managers believe climate risk is not fully priced into asset values, indicating growing investor focus on climate metrics. Investors are moving toward structured, science-backed approaches that ensure accountability and away from inconsistent ESG frameworks that have lost credibility.
The Investment Shift
As traditional ESG ratings face increased scrutiny for their lack of standardization, investors are looking for more precise ways to assess sustainability risks. More focused environmental impact measurement tools like life cycle assessment (LCA) and Scope 1, 2 and 3 greenhouse gas (GHG) emissions reporting are emerging as leading tools to account for carbon emissions and other key environmental factors.
Unlike ESG scores, which aggregate varied factors into broad ratings, LCA provides a structured, science-based evaluation of a product’s entire environmental footprint—from raw material extraction and supply chain emissions to product use and end-of-life disposal. Scope 1, 2 and 3 emissions reporting focuses on a company’s operational carbon footprint and is guided by the GHG Protocol Corporate Standard, a corporate accounting and reporting tool that tracks all seven greenhouse gases covered by the Kyoto Protocol.
Scope 1, 2 and 3 emissions are more commonly tracked and reported by larger public companies looking to adhere to regulations in states like California and jurisdictions like the European Union and Canada, which require such reporting. There is an important distinction between Scope 1, 2 and 3 data—which is a more general estimation of a company’s operational footprint—and product LCA data, which more precisely measures a product’s environmental or emissions footprint. LCA data enables an “apples-to-apples” comparison of two companies in the same industry in terms of how much they contribute to or reduce global warming. This distinction is critical for investors and corporations that really want to mitigate climate risk and achieve Net Zero targets in the coming decade.