Developing Double Materiality for Climate-Related Financial Policy
In this comment, RFF Senior Fellow Kevin Stiroh argues that effective financial policy requires more clarity on the underlying relationships between climate change, policy, and the financial system.
Introduction
The ‘double materiality’ framework helps guide financial policymakers in assessing the risks of climate change, but masks complex interactions within the financial system. I argue that effective policy requires more clarity on the underlying relationships and the links to specific mandates of different financial policymakers.
Climate change drives financial risks and disrupts economic activity in complex ways. To better understand the link between climate change and financial firms, policymakers introduced the concept of double materiality, which includes ‘financial materiality’, defined as the impact of climate change on a firm, and ‘impact materiality’, defined as the impact of a firm on the climate.
I further develop this framework by decomposing double materiality into distinct components that are relevant for different stakeholders within the financial sector. This decomposition helps financial policymakers to effectively respond to climate-related risks in a manner consistent with their specific statutory mandates and objectives. For example, bank supervisors are responsible for ensuring that supervised banks manage all material risks they face, financial stability authorities promote the stability of the financial system, and securities regulators protect investors through effective disclosure. All of these objectives may differ from those of a climate policymaker focused on broader mitigation or adaptation goals. By sharpening the double materiality discussion, financial policymakers can engage more productively with a wide range of stakeholders, including financial firms, investors, climate policymakers and the public, to effectively address the financial impact of climate change.
