The challenge of climate-related double materiality on the financial market

Résumé En

An essential element of financial market sustainability is business activity's environmental and social costs – which are not considered in traditional business analysis. Such an approach focuses on assessing the impact of financial institutions’ (banks, insurance companies, etc.) activities on the environment and society. Yet, it seems necessary to also consider the impact of environmental and social issues on the activities of financial institutions. Measures against such risks (precautions against the adverse effects of droughts or floods, for instance) can also be seen more broadly as contributing to sustainability goals. These two perspectives that point to the interlinkages/interdependences between activities and environment - the impact of financial institutions’ activities on the environment and the impact of environmental degradation on financial institutions’ activities - are known as “dual materiality/relevance”. Reducing the negative impact of economic activity on the environment in the long term should reduce the adverse effects of the environment on economic activity. In practice, we have two perspectives: the impact of economic activity on the environment (climate change as environmental and social materiality), and the impact of the environment on economic activity (climate change as financial materiality). Overall, understanding the concept of double materiality is vital for financial companies to effectively manage their risks and opportunities related to ESG factors and drive positive outcomes for their stakeholders and the broader society. Financial institutions have started adopting a double-materiality approach to risk management to address these risks. This approach involves assessing the company’s financial risks and the financial risks associated with the risks they act against. This can include assessing the potential economic impact of climate change on their operations and investments and the communities and businesses they insure. By adopting a double materiality approach, financial institutions can better understand and manage the risks associated with environmental and social factors. This can help them ensure their financial sustainability while contributing to the sustainability of the broader society and environment they operate in. In line with this, the article seeks to study the institutional framework (directives, regulations, initiatives, corporate reports, and statements) that could support the development of the double materiality approaches for the financial sector.