Fed paper highlights importance of double materiality

October 24, 2022|Written by |Federal Reserve

A new paper from Federal Reserve supervision committee member Kevin Stiroh has found that the concept of double materiality is important for macroprudential objectives. In addition, incorporating double materiality into policy frameworks would lead to greater constraints on the “externality‐generating activities” that drive climate change.

Defining double materiality as “the inclusion of feedback effects to bank risk that come from a bank’s contribution to climate change”, Stiroh uses a simple, partial equilibrium model to assess single and double materiality perspectives in the context of policy objectives. His analysis shows that double materiality can be coherently embedded in both micro and macroprudential frameworks, but is more practically significant at a systemic level.

A broader macroprudential perspective approach that incorporates financial sector externalities is also internally coherent and consistent with the financial stability mandates of certain central banks and supervisory authorities, the study suggests.

Emphasising that his paper “does not take a normative stand on the appropriate policy”, Stiroh calls for further research using more sophisticated models and for greater examination of how climate change impacts bank risk. He also advocates the use of forward‐looking scenario analysis to assess relative impacts across different bank exposures to climate risk in order to help banks and supervisors better understand the range of potential differences.

Stiroh currently leads the Fed’s supervision climate committee, which brings together senior staff from across the Federal Reserve system to focus on the implications of climate change. He is also co-chair of the Basel Committee’s Task Force on Climate-Related Financial Risks.

This page was last updated October 24, 2022

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