Corporate Sustainability: First Evidence on Materiality

Abstract

An increasing number of companies make sustainability investments, and an increasing number of investors integrate sustainability performance data in their capital allocation decisions. To date however, the prior academic literature has not distinguished between investments in material versus immaterial sustainability issues. We develop a novel dataset by hand-mapping data on sustainability investments classified as material for each industry into firm-specific performance data on a variety of sustainability investments. This allows us to present new evidence on the value implications of sustainability investments. Using calendar-time portfolio stock return regressions we find that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing. Further, firms with good performance on sustainability issues not classified as material do not underperform firms with poor performance on these same issues, suggesting investments in sustainability issues are at a minimum not value-destroying. Finally, firms with good performance on material issues and concurrently poor performance on immaterial issues perform the best. These results speak to the efficiency of firms' sustainability investments, and also have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

What Drives Investor Response to CSR Performance Reports?

“…As in the main experiment, we also asked participants to provide their willingness to invest in the firm's stock on an 11-point scale and how much of a $10,000 inheritance they would be willing to invest in the firm's stock. We averaged the standardized responses to these questions (Cronbach's alpha = 0.80), and find that participants' investors differentiate the materiality of the CSR performance between industries, which is consistent with both the SASB Materiality Map™ and the empirical results of Khan et al (2016). In addition, we did a follow-up experiment to test whether explicit assessment makes the positive impact of positive CSR metrics go away for immaterial CSR issues in the alternative Oil and Gas industry.…”

Sustainable Investing and the Cross-Section of Maximum Drawdown

“…They find that positive synergies explain social-financial performance correlations. [Khan et al, 2016] using KLD 1 data and explore the question of materiality, i.e., a classification that maps different sustainable indicators as material for different industries. Using both portfolio and firm-level regressions, they find that firms with good ratings significantly outperform firms with poor ratings.…”

The Relationship between Investor Materiality and the Sustainable Development Goals: A Methodological Framework

“…In this paper, we present a framework which will enable investors and companies to contribute to the SDGs by identifying the material ESG issues (what investors care about) by sector that also contribute to the SDGs (what the world cares about). Within the broader framework of the performance implications of sustainability investments [10][11][12][13][14] and starting from the evidence of how ESG materiality positively affects financial performance [15,16], we aim at providing a new framing able to answer to the long-standing question of "Can a company do well by doing good?" In particular, will contributing to the SDGs be good for a company's financial performance or will creating these positive externalities actually hurt financial performance?…”