Usher calls for double materiality approach in ESG investment decision making.
The materiality definition adopted by the Task Force on Climate-related Financial Disclosures (TCFD) is insufficient in serving the battle against climate change, Eric Usher, the Head of UN Environment Programme Finance Initiative (UNEP FI), said today.
Speaking at the Climate Risk and Green Finance Regulatory Forum, Usher explained that the TCFD was established initially by the Financial Stability Board (FSB) with the aim of ensuring financial stability, rather than climate stability.
This “exclusive focus” on systemic risk to the finance sector resulted in a “short-term outside-in approach to materiality” that would not drive real-world change, Usher suggested.
“What we need to add is inside-out leadership, focusing on the impact of financing [on] the targeted outside dimension, which aligns financing and financial portfolios with societal objectives, such as keeping the climate within 1.5 degrees of warming,” he said.
This means investors must be led by a longer-term ESG vision and strategy to align portfolios with economies that fully deliver the Sustainable Development Goals (SDGs), he added.
“Financial institutions will have on their radar screens the two materialities at hand; the classic materiality on how ESG will impact portfolios as well as the newer materiality of how portfolios will impact our planet and our society.”
TCFD guidelines say reporting companies should determine materiality for climate-related issues consistent with how they determine the materiality of other information included in their financial filings, but cautions against “prematurely concluding that climate-related risks and opportunities are not material based on perceptions of the longer-term nature of some climate-related risks”.
The upcoming revisions to the European Union’s Non-Financial Disclosure Regulation (NFRD) enshrine the concept dual materiality, also recognising the evolutionary nature of materiality, with environmental or social issues developing financial consequences over time.
TCFD disclosure recommendations have been widely adopted by large corporates globally. The UK recently became the first country to adopt its recommendations on a mandatory basis.
Usher’s call for a so-called double materiality approach comes also in reaction to the increasing urgency to tackle climate change.
“As we build back from Covid, we need to squarely understand that we are moving from a changing climate to a climate emergency,” Usher said.
The UNEP FI head said financial institutions can be key influential actors in solving the crisis, through partnership with governments, policy makers, regulators, scientists and their own portfolio companies.
To this end, Usher called for standardised, comparable and forward-looking disclosure, covering all dimensions on materiality, including impact, and for TCFD targets to be science-based.
“Financial leaders need to position for and contribute to these changes, developing new products and services and progressively and earnestly aligning their portfolios and businesses with the net zero transition and the other societal objectives,” Usher said.