We present a multiscale theoretical framework to investigate the interplay between diffusion and finite lattice deformation in phase transformation materials. In this framework, we use the Cauchy–Born Rule and the Principle of Virtual Power to derive a thermodynamically consistent theory coupling the diffusion of a guest species (Cahn–Hilliard type) with the finite deformation of host lattices (nonlinear gradient elasticity). We adapt this theory to intercalation materials – specifically Li1−2Mn2O4 – to investigate the delicate interplay between Li-diffusion and the cubic-to-tetragonal deformation of lattices. Our computations reveal fundamental insights into the microstructural evolution pathways under dynamic discharge conditions, and provide quantitative insights into the nucleation and growth of twinned microstructures during intercalation. Additionally, our results identify regions of stress concentrations (e.g., at phase boundaries, particle surfaces) that arise from lattice misfit and accumulate in the electrode with repeated cycling. These findings suggest a potential mechanism for structural decay in Li2Mn2O4. More generally, we establish a theoretical framework that can be used to investigate microstructural evolution pathways, across multiple length scales, in first-order phase transformation materials.