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

Should a business or an investment fund care only about how environmental, social justice and governance (ESG) issues affect its bottom line, or should they also be attuned to how their operations affect the world? These questions get at the heart of something called “double materiality.” While the idea that both are important has been embraced in Europe, it has yet to make significant inroads in the US. At issue is what information companies should be required 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 ESG factors that may pose a threat or opportunity to a business and its bottom line, such as extreme weather. 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.