IDEAS home Printed from https://ideas.repec.org/p/rff/dpaper/dp-26-09.html

Decomposing the Double Materiality of Climate-Related Financial Risk

Author

Listed:
  • Stiroh, Kevin

    (Resources for the Future)

Abstract

Financial policy discussions related to prudential policy and “double materiality” have considered both the impact of climate change on a bank and the impact that the bank has on climate change. This paper presents an illustrative framework with a set of internally consistent definitions and linkages to facilitate productive discussions for banks, investors, and prudential and disclosure policymakers. The framework decomposes double materiality into several conceptually distinct linkages from the perspective of an individual bank: the exogenous impact of physical and transition risks, the impact of the bank’s activities on climate change and resulting risk drivers, feedback effects from the bank’s activities on its own risks, and spillover effects to other financial institutions or the broader economy. By providing clear definitions and incorporating insights from the macro-modeling literature, this framework can help promote more productive policy discussions.

Suggested Citation

  • Stiroh, Kevin, 2026. "Decomposing the Double Materiality of Climate-Related Financial Risk," RFF Working Paper Series 26-09, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-26-09
    as

    Download full text from publisher

    File URL: https://www.rff.org/documents/5337/WP_26-09.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael D. Bauer & Eric A. Offner & Glenn D. Rudebusch, 2023. "The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act," CESifo Working Paper Series 10739, CESifo.
    2. Carattini, Stefano & Kim, Giseong & Melkadze, Givi & Pommeret, Aude, 2024. "Carbon taxes and tariffs, financial frictions, and international spillovers," European Economic Review, Elsevier, vol. 170(C).
    3. Barbara Annicchiarico & Marco Carli & Francesca Diluiso, 2022. "Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles," CEIS Research Paper 543, Tor Vergata University, CEIS, revised 31 Oct 2022.
    4. Döttling, Robin & Rola-Janicka, Magdalena, 2025. "Too Levered for Pigou: Carbon pricing, financial constraints, and leverage regulation," Journal of Financial Economics, Elsevier, vol. 172(C).
    5. Celso Brunetti & Benjamin Dennis & Dylan Gates & Diana Hancock & David Ignell & Elizabeth K. Kiser & Gurubala Kotta & Anna Kovner & Richard J. Rosen & Nicholas K. Tabor, 2021. "Climate Change and Financial Stability," FEDS Notes 2021-03-19-3, Board of Governors of the Federal Reserve System (U.S.).
    6. Celso Brunetti & Matteo Crosignani & Benjamin Dennis & Gurubala Kotta & Donald P. Morgan & Chaehee Shin & Ilknur Zer, 2024. "Climate-Related Financial Stability Risks for the United States: Methods and Applications," Economic Policy Review, Federal Reserve Bank of New York, vol. 30(1), pages 1-37, October.
    7. Laura T. Starks, 2023. "Presidential Address: Sustainable Finance and ESG Issues—Value versus Values," Journal of Finance, American Finance Association, vol. 78(4), pages 1837-1872, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcinkowska, Monika & Brzeszczyński, Janusz & Charteris, Ailie & Gajdka, Jerzy & Obojska, Lidia & Szczygielski, Jan Jakub, 2025. "Sustainability, energy finance and the role of central banks: A review of current insights and future research directions," Energy Economics, Elsevier, vol. 144(C).
    2. Han, Guiming & Preda, Alex, 2025. "Does home bias amplify the disposition effect? Evidence from retail forex trading," Finance Research Letters, Elsevier, vol. 86(PB).
    3. Ole-Andreas Elvik Næss, 2026. "Owner Support for Green Shareholder Voting and Divestment," Management Science, INFORMS, vol. 72(5), pages 3629-3649, May.
    4. Kim, Yunsang & Melkadze, Givi, 2026. "Macroeconomic effects of carbon pricing: The role of bank credit," Journal of Economic Dynamics and Control, Elsevier, vol. 191(C).
    5. Patrick Gruning & Zeynep Kantur, 2024. "Financial Intermediation and Climate Change in a Production and Investment Network Model for the Euro Area," Working Papers 2024/06, Latvijas Banka.
    6. Sirin, Selahattin Murat & Yilmaz, Berna N., 2025. "Tech firms and the renewable energy sector: Exploring the moderating effects of institutional ownership on financial connectedness," Research in International Business and Finance, Elsevier, vol. 80(C).
    7. Valentina Minutiello & Patrizia Tettamanzi & Michael Murgolo, 2026. "Small but Impactful: The Growing Role of SMES in Sustainability and ESG Reporting," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 33(1), pages 925-940, January.
    8. Caroline Flammer, 2026. "Sustainable Finance: Tools, Effectiveness, and Challenges," Asian Economic Policy Review, Japan Center for Economic Research, vol. 21(1), pages 14-19, January.
    9. Alberto Dell'Acqua & Massimo Mariani & Eva‐Maria Besserer & Domenico Frascati, 2026. "Sustainable Barbarians: The Role of Private Equity and Venture Capital on ESG Performance," Business Strategy and the Environment, Wiley Blackwell, vol. 35(2), pages 3018-3043, February.
    10. Nie,Ou & Regelink,Martijn Gert Jan & Wang,Dieter, 2023. "Banking Sector Risk in the Aftermath of Climate Change and Environmental-RelatedNatural Disasters," Policy Research Working Paper Series 10326, The World Bank.
    11. Donia Besher & Anirban Sengupta & Tanujit Chakraborty, 2025. "Probabilistic Forecasting of Climate Policy Uncertainty: The Role of Macro-financial Variables and Google Search Data," Papers 2507.12276, arXiv.org, revised Jan 2026.
    12. Wanidwaranan, Phasin & Wongkantarakorn, Jutamas & Padungsaksawasdi, Chaiyuth, 2025. "Climate policy uncertainty and trading behavior: Evidence from aggregate herd behavior," Energy Economics, Elsevier, vol. 149(C).
    13. George, Ammu & Huang, Jingong & Nie, He & Xie, Taojun, 2025. "Can sustainability-linked lending reconcile environmental and financial motives?," International Review of Financial Analysis, Elsevier, vol. 104(PB).
    14. Qian Liu & Charlotte Marie Süring & Bo Jellesmark Thorsen & Sophus O. S. E. Zu Ermgassen & Niels Strange & Sven Wunder & Joseph W. Bull & Carl‐Johan Lagerkvist & Thomas Lundhede, 2025. "A Scoping Review of Determinants of Business Engagement With Biodiversity," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 32(4), pages 5540-5556, July.
    15. Ayako Yasuda, 2026. "Comment on “Sustainable Finance: Tools, Effectiveness, and Challenges”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 21(1), pages 20-21, January.
    16. Filippini, Massimo & Leippold, Markus & Wekhof, Tobias, 2026. "The impact of sustainable finance literacy on investment decisions," Journal of Banking & Finance, Elsevier, vol. 187(C).
    17. Alan Munodei & Athenia Bongani Sibindi, 2023. "Fintech Innovation in Social Service Provision: A Bibliometric Review," Social Sciences, MDPI, vol. 12(1), pages 1-22, January.
    18. Bhadury, Soumya & Pratap, Bhanu & Gajbhiye, Dhirendra, 2025. "Transition to a greener economy: Climate change risks and resilience in a state-space framework," Journal of Asian Economics, Elsevier, vol. 98(C).
    19. Dunbar, Kwamie & Treku, Daniel N., 2025. "Do energy transition investment flows aid climate commitments?," Energy Economics, Elsevier, vol. 142(C).
    20. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rff:dpaper:dp-26-09. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Resources for the Future (email available below). General contact details of provider: https://edirc.repec.org/data/rffffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.