Decomposing the Double Materiality of Climate-Related Financial Risk

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.