By Deon Dreyer, Investment Director and leads on ESG Advisory at Broadstone
Climate change is no longer a distant threat – it’s a financial reality. Pension schemes, insurers and corporates are already feeling its effects through market volatility, changing regulation and evolving member expectations.
Physical risks such as floods and heatwaves, for example, can damage company assets and supply chains. Meanwhile, transition risks – like new carbon taxes or policy shifts – can change the value of entire industries almost overnight.
For pension schemes, this presents a dual challenge. On one hand, climate change will affect pensions directly through investment performance and funding levels. On the other, pension schemes themselves play a powerful role in shaping the transition to a low-carbon economy through the investment choices they make – which can in turn impact their outcomes and the planet.
To understand and manage both sides of this challenge, regulators and investors are turning to a concept known as double materiality.
In this article, I’ll explain what double materiality is, why it’s important for pension schemes, and how it can help trustees and sponsors make better investment decisions in the face of climate change.
Read more: Climate Risk in Focus: Broadstone’s Assessment and PRA’s Evolving Expectations
What is double materiality?
Double materiality combines two ways of looking at sustainability:
- Financial materiality – This is how climate change affects your portfolio. This is the traditional risk view: for example, rising temperatures can reduce agricultural output, which can affect food sector investments. Similarly, new carbon taxes can change company profitability and, therefore, share prices.
- Impact materiality – This is how your portfolio affects the climate and society. For example, investing in a company with high emissions or poor labour practices contributes directly to climate and social risk.
Both perspectives matter because they are inherently connected. If your investments harm the planet or society, your portfolio will eventually feel the consequences – whether through regulation, market repricing, or reputational damage.
What double materiality means for pension schemes
For many years, investors looked only at the first side of the equation – how climate change might affect their returns and what were the additional climate change risks that they were exposed to. Now, regulation requires them to also consider how their investments affect the world around them.
This principle is embedded in the EU’s Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the UK’s emerging climate disclosure rules. Each of these frameworks begins by assessing how the world impacts your portfolio, and then examines your portfolio’s impact on the world.
For pension schemes, this matters directly. A double materiality assessment helps identify both:
- Financial materiality: The risks climate change poses to scheme performance (such as stranded assets, market shocks or specific asset class underperformance).
- Impact materiality: The impact the scheme’s investments have on society (for instance, whether capital supports sustainable industries or those driving environmental harm).
This dual view makes it easier to see how climate change will affect pensions – and how pension funds can reduce that risk through smarter, more sustainable investment choices.
Read more: General Code – Climate Change Risk
How Broadstone applies double materiality in practice
At Broadstone, we apply double materiality every day through our investment consulting and climate modelling work. Using tools from our partnership with Ortec Finance, Clarity AI and our in-house climate change risk framework, we help schemes understand both financial and impact materiality.
Our double materiality assessment involves:
- Financial Materiality
- Analysing portfolios under different climate change scenarios, Delayed Net-Zero 1.9°C, Limited Action 2.9°C and High Warming 3.7°C (above pre-industrial levels)
- Determining the climate change risk exposures in totality and per asset class, over time and at particular points in time
- Understanding which of the key elements, transition risk, physical risk or pricing-in shocks are the contributors to this risk
- Dissecting the equity and corporate bond sectoral exposures to determine the scheme’s climate change risks and exposures to particular sectors
- Impact Materiality:
- Carbon footprinting – Measuring emissions linked to portfolio holdings (backward looking)
- Temperature alignment – Showing how close a portfolio is to aligning to the goals of the Paris Agreement with the aim of limiting temperature to well below 2°C above pre-industrial levels (Forward looking)
- Net-zero alignment – indicates how the underlying investments in the portfolio are progressing with achieving the target of “net-zero emissions by 2050” (forward looking)
- UN SDG alignment – Mapping exposure to the UN Sustainable Development Goals (SDGs) – identifying where investments support or undermine global sustainability targets.
For example, if a pension fund holds large positions in fossil fuel companies, scenario modelling might reveal higher long-term volatility and lower expected returns compared to a more diversified or low-carbon portfolio. When selecting fund managers to manage these portfolios and exposures, the impact materiality of these investments can then be measured.
Read more: Broadstone’s Sustainability Report
Why double materiality extends beyond climate
Although double materiality is usually applied to the climate, it also applies across the full Environmental, Social and Governance (ESG) landscape.
For instance:
- Environmental – Investments in companies with poor water management may face future restrictions or fines.
- Social – Firms with weak labour standards may encounter workforce disruption or reputational risk.
- Governance – Lack of board diversity or weak oversight can increase operational and compliance risks.
Each of these factors affects long-term portfolio value. Pension schemes, as long-term investors, are especially exposed – and uniquely positioned to drive positive change by considering both risk and responsibility.
Taking action on double materiality
For trustees, applying double materiality is about clarity and structure – knowing what to measure, what to model and how to respond.
At Broadstone, we help pension schemes to:
- Understand how financial and impact materiality interact.
- Model the long-term effects of climate scenarios on asset returns, risk and funding levels.
- Measure key indicators such as emissions, biodiversity impact and social outcomes.
- Align investment strategies with Net Zero targets and the UN SDGs.
For example, a scheme might use this approach to shift from carbon-heavy industries to renewables or green infrastructure, protecting long-term value while supporting decarbonisation.
Why this matters for the future
Understanding double materiality is more than a regulatory obligation – it’s a mindset that connects financial performance with global responsibility. It recognises that pensions and climate change are inseparable: the assets that deliver returns today shape the environment in which members will retire tomorrow.
All legislation starts by assessing the impact of the world on your portfolio – and then your portfolio’s impact on the world. By embracing that two-way perspective, pension schemes can improve resilience, meet regulatory expectations, and play a meaningful role in building a sustainable future.
