Climate-Related Financial Risk in Early ESG Integration Models: A Literature Review

Abstract

This study examines how early Environmental, Social, and Governance (ESG) integration models addressed climate-related financial risk at a time when climate exposures were not yet fully recognized as material drivers of firm performance. The review synthesizes peer-reviewed evidence to clarify the extent to which early ESG frameworks captured climate-specific vulnerabilities and how these limitations affected financial analysis. Findings show that aggregated environmental indicators and voluntary disclosures often failed to identify transition and physical risks, while financial markets increasingly priced climate information through channels such as carbon emissions, downside risk, and sensitivity to climate news. The article discusses patterns across empirical studies, highlighting challenges in disclosure quality, rating inconsistencies, and the absence of forward-looking climate metrics. Overall, the review finds that early ESG models provided foundational sustainability insights but were insufficient for assessing climate-related financial risk, underscoring the need for more precise and climate-aligned integration tools.