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What New ESG Approach ‘Double Materiality’ Means — and Why JPMorgan Is a Fan

JPMorgan Trading-Floor Staff Return To Office
Photographer: Michael Nagle/Bloomberg
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Should a business or an investment fund care only about making money, or should it also worry about the environment, social justice and good governance (ESG)? Can the two goals overlap? Do they already? These questions get at the heart of something called “double materiality.” While the concept has been built into new European regulations, it has yet to make significant inroads in the US -- even as Wall Street behemoths like JPMorgan Chase & Co. embrace the idea. At issue is what information should be mandatory to report, and who decides? 

At the basic level it’s an accounting principle, referring to something that may have an impact on -- be material to -- how a company performs. A material risk can threaten targets or goals -- something of keen interest to investors. In the context of ESG, this is known as single materiality and means mainly environmental, social and governance factors that may pose a threat or opportunity to a business and its bottom line. It doesn’t tell you anything about how “green” a company’s business practices are, but rather how vulnerable its earnings may be to ESG risks.