Double Materiality Assessment
for Banking & Finance

Double materiality assessment for Banking & Finance

Banking and financial services entities face a unique double materiality challenge under CSRD: their most significant environmental impacts are indirect, flowing through the lending and investment portfolios rather than through their own operations. A mid-sized European bank's Scope 1 and 2 emissions from office buildings are trivial compared to the Scope 3 category 15 (financed emissions) from its corporate loan book. ESRS E1 requires disclosure of Scope 3 where material, and for banks, financed emissions are almost always the dominant category. The double materiality assessment under ESRS 1.20-33 must capture this indirect impact pathway, which means banks need carbon data from their borrowers and investees.

E1 Climate change is material for virtually every bank on both dimensions. Impact materiality arises from financed emissions (the bank enables carbon-intensive activities through lending). Financial materiality comes from climate transition risk (loan defaults as carbon-intensive borrowers face stranded assets, regulatory costs, or demand shifts) and physical risk (collateral impairment from flood, drought, or extreme weather events). The ECB's 2022 climate stress test found that 60% of eurozone banks did not have adequate climate risk frameworks, and the ECB has since integrated climate risk into its supervisory review process (SREP). S1 Own workforce covers standard employment topics but also includes specific financial sector concerns like bonus structures, gender pay gaps in front-office roles, and mental health pressures. S4 Consumers and end-users is material for retail banks through responsible lending practices, treatment of customers in financial difficulty, and access to basic banking services. The EBA's guidelines on loan origination (EBA/GL/2020/06) already impose conduct requirements that overlap with S4 disclosure. G1 Business conduct is always material for financial institutions given anti-money laundering obligations, sanctions compliance, market abuse prevention, and the fiduciary duties inherent in financial intermediation.

Assurance providers flag several recurring weaknesses in banking double materiality assessments. The most frequent is treating financed emissions as a data problem rather than a materiality assessment requirement. Banks argue they cannot assess E1 impact materiality because they lack borrower-level emissions data. This conflates disclosure capability with materiality determination. The topic is material regardless of data availability; the disclosure may use estimates and proxies per ESRS 1.67, but the materiality conclusion itself cannot be deferred. A second common finding is the omission of S3 Affected communities. Banks financing large infrastructure projects, extractive industries, or real estate developments in sensitive locations have indirect impacts on communities through their lending decisions. The assessment must evaluate this per ESRS 1.30's value chain requirement.

Banks should structure their assessment around portfolio segments. For the corporate loan book, categorise borrowers by NACE sector and assess which ESRS topics apply to each sector, then aggregate to determine the bank's exposure. For retail lending (mortgages, consumer credit), assess E1 financial materiality through physical risk exposure of collateral and S4 impact materiality through lending conduct. For asset management, assess the investment portfolio using similar sector-based analysis. Use the Partnership for Carbon Accounting Financials (PCAF) methodology for financed emissions estimation, as recommended by EFRAG's draft sector-specific guidance for financial institutions.