‘Double materiality’: what is it and why does it matter?

April 25, 2021Written by LSE Grantham Research Institute on Climate Change

The idea that the environmental effects of financing and corporate activities is materially important is central to any conception of a sustainable financial system, writes Matthias Täger in this cutting edge commentary from Grantham Research Institute on Climate Change and the Environment at the London School of Economics. This is the concept of “double materiality”, expanding the conventional understanding of what accounting standards consider ‘material’ to include not only climate-related impacts on the company but also the impacts of a company on the climate.

To ensure that investors can make informed decisions, companies are required to disclose information if that information is considered “material” or important to the company’s success or failure. But what is considered important depends on the question ‘important to whom?’, Täger points out. Conventional interpretations of what is considered important focus on “the alleged information needs of a single stylised textbook investor,” he says, while sidelining investor’s other information needs, not least concerning emissions and other environmental effects.

The concept of ‘double materiality’ addresses this information gap by expanding what is considered important, incorporating the effects of the company’s activities on climate change and the environment as well as on the bottom line. While materiality is the effect of climate change on finance and corporate activities, double materiality includes the effect of finance and corporate activities on climate change.

Individual financial institutions are responding to climate change along a spectrum between aligning investment activity with the Paris Agreement on one hand, and managing climate-related risks on the other, writes Täger. Double materiality fills information needs across this entire spectrum, he shows, rather than focusing only on climate risk management.

Investors and regulators are teaming up to advocate for net-zero carbon emissions, and to promote the rapid growth of green and climate-related finance and ‘shift the trillions’ away from carbon and towards sustainable alternatives. What gets measured gets managed, and so disclosure requirements can directly affect corporate behaviour.

However the understanding of what information a user of financial statements needs is artificially uniform, writes Täger, disrupting the smooth and free functioning of markets. Despite their importance in capital allocation and market dynamics, accounting standards are not neutral and simply reflect social conventions, he says, and so “their implications for facilitating or preventing climate-aligned investment therefore deserve close attention.”

This page was last updated September 29, 2021

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