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How material is a material issue? Stock returns and the financial relevance and financial intensity of ESG materiality

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Abstract

This paper investigates the role of the intensity and relevance of ESG materiality in equity returns. Adopting the classifications of materiality provided by the Sustainability Accounting Standards Board (SASB), the paper introduces the concept of the financial relevance and financial intensity of ESG materiality in order to estimate how it explains equity returns. The results of the analysis, based on a large sample of U.S. companies included in the Russell 3000 from January 2008 to July 2019 show that not only do ESG rating changes (ESG momentum) have a consistent impact on equity performance, but also that the market seems to reward more those companies operating in industries with a high level of concentration of ESG materiality. The implication is that the equity premium of listed companies is better explained by the concentration of material issues (i.e. the Gini index) than by the ESG momentum.

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... The authors also find that ESG momentum generates considerable gain in the short period while minimal in the long run. Further, Consolandi et al. (2020) also analyze the significance of ESG materiality and ESG momentum for the top Russell 3000 stocks and report that the materiality issues and ESG momentum well define the demand for the equity premium. Moreover, Andersson et al. (2020) exhibit the interaction between equity, currency and commodity markets considering ESG-based portfolios and find short-and medium-term causality and weak in the long run. ...
... The augmented dickey fuller test signifies no unit root for the stock returns and uncertainty indexes. Moreover, it is seen that Sharpe's ratio for sustainable stock outperforms the conventional stocks index (Consolandi et al., 2020;Maiti, 2020). Table 2 presents spearman's correlation between stock indexes and uncertainty indexes. ...
Article
Purpose In recent times, sustainable investment gaining much attention within the investors’ community and it is broadly driven by environmental, social and governance (ESG) factors. This study aims to examine the ESG-based sustainability index and economic policy uncertainty (EPU). Design/methodology/approach Corporate sustainability assessment procedure yields Dow Jones sustainability indexes (DJSIUS) and ESG compliant firms become a member of such indexes. To uncover the effects of policy uncertainty as follows: the study considers EPU index, equity market policy uncertainty index, economic and political events for the period 2000–2017. The authors present the study using a conditional volatility framework. Findings The correlation between the DJSIUS and policy uncertainty appears to be negative and statistically significant. It is apparent from the results that policy uncertainty does contain important ESG factors that explain the sustainable investment in US firms. Moreover, the stock market boom, credit crunch, Lehman collapse and fiscal crises have shown significant adverse effects on the sustainability index. More importantly, it is seen that investors’ sustainable investing considers presidential election years for portfolio planning; the uncertainty associated with the election years has also shown a negative impact on the sustainable returns. Practical implications First, sustainability is essential for the long-term stakeholders’ wealth maximization under governments’ policy uncertainty such as constrained resources, demographic and climate-change-policy, societal expectations, public-policies, regulatory structure. Second, EPU creates new opportunities and risks for sustainable firms and sustainable investing. Originality/value The study is novel in which the authors present the effects of uncertainty on socially responsible investing.
... Ce qui est considéré « matériel » aux yeux de ce type d'utilisateur, en tout cas dans l'hypothèse retenue par le normalisateur, est ce qui est susceptible d'impacter la valeur financière de son intérêt dans l'entreprise (Young, 2006 Quand il est introduit dans la littérature académique en relation aux informations nonfinancières, le terme « matérialité » prend tout de suite une signification financière (Khan, Serafeim & Yoon, 2016). Il s'agit d'une évolution sémantique qui n'a rien d'une fatalité ; après tout, historiquement, le terme décrit simplement ce qui est considéré comme valant la peine d'être pris en compte dans la production d'un jugement (Bentham, 1789 (Consolandi, Eccles, & Gabbi, 2020). Ces auteurs expliquent leur motivation de la manière suivante : « Because of its link to financial performance and because it is framed in the language of finance, we believe that materiality will increasingly represent the issue for validating the relevance of ESG to financial performance and therefore it needs to be further investigated » (p. ...
Thesis
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En réponse à la demande d’investisseurs, l’analyse de la performance ESG (environnementale, sociale, de gouvernance) des entreprises est pratiquée par de plus en plus d’analystes. Cette performance ne connaît pas de définition juridique ou institutionnelle standardisée et est donc produite par les méthodologies développées pour la mesurer. Ma thèse explore, à partir d’une auto-ethnographie suivie d’une enquête de terrain qualitative, comment les analystes produisent cette performance, mais aussi leur propre identitéprofessionnelle, en interaction avec les normes épistémiques et discursives financières. L’interprétation des données à travers un cadre théorique inspiré d’Axel Honneth et de Judith Butler dévoile comment les analystes s’assujettissent à ces normes qui déterminent leur reconnaissance professionnelle et la reconnaissabilité de leurs analyses, mais qui produisent également une représentation réifiée du monde quine permettra pas de mettre la finance au service de la transition écologique et sociale.
... Some recent studies (e.g., Khan, 2019;Fiskerstrand et al., 2020;Stotz, 2021;Torre et al., 2020) deal with ESG compliance and governance, ESG ratings, and financial performance, ESG preferences or commitment, and expected returns. Besides, some notable works (e.g., Chen & Yang, 2020;Consolandi et al., 2020;Cornell, 2021;Maiti, 2020) examine the information contained in the ESG disclosures and ESG materiality and momentum effects on the equity premiums and ESG risk factor in returns forecasting. Hence, unlike the previous studies, the study presents international evidence on the sustainability practice and the firm's financial performance. ...
Article
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This article attempts to bring quantitative evidence of a firm’s sustainability reporting in terms of non-financial voluntary disclosures. The disclosures are made available through the annual report and Corporate Social Responsibility (CSR) and Global Reporting Initiatives (GRI) report. ESG score is a quantitative measure developed and disseminated by Bloomberg, covering about 120 Environmental, Social, and Governance aspects. The study’s research problem is to examine the effects of non-market transnational sustainability strategy on firm performance. The study presents an analysis of nearly 510 firm’s ESG scores across 17 countries for 2010–2018. The descriptive and inductive statistical analysis shows that ESG compliance is more pronounced in European companies. Simultaneously, Asian firms are more disciplined concerning the energy sector, and the Asiapacific counterpart is more inclined toward technology firms. The study shows that GRI and nonGRI companies differ significantly in their accounting performance (ROA and ROE) and market valuations (Tobin’s-Q). The environmental dimension appears intimidating across accounting and market-based firm performance, while the social dimension contributes adversely, and governance positively affects operational efficiency.
... In the current state of the academic debate, some research finds material outperformance for portfolios and funds formed of high-ESG stocks (Khan, 2019;Alda, 2020;Consolandi et al.,2020), while others argue there is no statistically significant difference in their risk-adjusted returns (Halbritter and Dorfleitner, 2015;Naffa and Fain, 2021). Hubel and Scholtz (2020) document that, conversely, low-ESG stocks outperform high-ESG stocks and attribute that to the transition risks associated with investment in stocks with poor environmental, social, and governance performance. ...
Article
This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms.
... In other words, we contend that the SASB-adjusted score allows investors to better differentiate Sustainability 2021, 13, 3652 3 of 21 between firms who score highly on ESG issues that are financially material to their business (business-critical ESG issues), from firms who score highly on issues that are not financially material to their business. Because investment practices are deeply rooted in the financial logic of shareholder value, despite of its social and environmental goals, our evidence corroborates the evidence that integrating financial materiality in ESG scores can better inform investment decisions based on ESG performance [16]. Hence, our study also contributes to the development of improved measures for both ESG disclosure quality and ESG performance assessment. ...
Article
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The effect of considering the financial materiality of ESG (environmental, social and governance) issues on firms’ ESG performance scores and rankings is investigated using Morgan Stanley Capital International (MSCI) ESG Ratings and the financial Materiality Map® developed by the Sustainability Accounting Standard Board (SASB). Results show that when financial materiality is applied, firms’ ESG performance scores change significantly. Further corroboration is provided by significant changes in firms’ ESG rankings when ESG performance assessment is based on SASB-adjusted ESG performance scores. Environmental pillar issues, and particularly natural resource use, are predominantly responsible for the changes. Overall, the results suggest that financial materiality affects the informative value of ESG scores and rankings, allowing the identification of investment opportunities in firms with high scores on business-critical ESG issues. We argue that consideration of financial materiality can better inform investment decisions based on ESG performance. This study adds to the understanding and assessment of ESG performance and its information content.
... News based ESG Similar to Consolandi et al. (2020), we use an ESG metrics dataset from Truvalue Labs which encompasses the materiality issues of the Sustainability Accounting Standard Board (SASB). SASB is one of the main voluntary 2 reporting frameworks adopted by corporates to report on ESG issues. ...
Article
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ESG investing’s popularity has continually increased in the past five years. ESG data is increasingly integrated into investment processes. However, the information contained in ESG-related news for corporates has not been entirely exploited by institutional and long-only investors. The objective of this paper is to identify the benefits of ESG news information for active and factor-based investors. Indeed, one of the issues with ESG is the low frequency of scores updates. For active management, we analyze ESG-sorted portfolios in investment universes filtered by ESG news volume. Metrics of ESG-related news are sourced from Truvalue Labs, a provider of Artificial Intelligence powered ESG insights and analytics. We find that the approach of a universe focused on ESG news of corporates has been efficient in the early 2010s on the lower ESG-ranked side of the universe, but also on the higher ESG rank. More recently, it has positively contributed to more dynamic approaches of ESG investing. Finally, increasing the sensitivity to the highly visible SDGs significantly improves the return of ESG long-short portfolios.
... News based ESG Similar to Consolandi et al. (2020), we use an ESG metrics dataset from Truvalue Labs which encompasses the materiality issues of the Sustainability Accounting Standard Board (SASB). SASB is one of the main voluntary 2 reporting frameworks adopted by corporates to report on ESG issues. ...
Preprint
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ESG investing's popularity has continually increased in the past five years. ESG data is increasingly integrated into investment processes. However, the information contained in ESG-related news for corporates has not been entirely exploited by institutional and long-only investors. The objective of this paper is to identify the benefits of ESG news information for active and factor-based investors. Indeed, one of the issues with ESG is the low frequency of score updates. For active management, we analyze ESG-sorted portfolios in investment universes filtered by ESG news volume. Metrics of ESG-related news are sourced from Truvalue Labs, a provider of Artificial Intelligence-powered ESG insights and analytics. We find that the approach of a universe focused on ESG news of corporates has been efficient in the early 2010s on the lower ESG-ranked side of the universe, but also on the higher ESG rank. More recently, it has positively contributed to more dynamic approaches to ESG investing. Finally, increasing the sensitivity to the highly visible SDGs significantly improves the return of ESG long-short portfolios.
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Preprint
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While environmental, social, and governance (ESG) trading activity has been a distinctive feature of financial markets, the debate if ESG scores can also convey information regarding a company's riskiness remains open. Regulatory authorities, such as the European Banking Authority (EBA), have acknowledged that ESG factors can contribute to risk. Therefore, it is important to model such risks and quantify what part of a company's riskiness can be attributed to the ESG ratings. This paper aims to question whether ESG scores can be used to provide information on (tail) riskiness. By analyzing the (tail) dependence structure of companies with a range of ESG scores, using high-dimensional vine copula modelling, we are able to show that risk can also depend on and be directly associated with a specific ESG rating class. Empirical findings on real-world data show positive not negligible dependencies between clusters determined by ESG scores, especially during the 2008 crisis.
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Faculty of Business, McMaster University. The author is indebted to Professors Harold Bierman, Jr., Thomas R. Dyckman, Roland E. Dukes, Seymour Smidt, Bernell K. Stone, all of Cornell University, and particularly to this Journal's referees, Nancy L. Jacob and Marshall E. Blume, for their very helpful comments and suggestions. Of course, any remaining errors are the author's responsibility. Research support from the Graduate School of Business and Public Administration, Cornell University is gratefully acknowledged.
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We show that the external habit-formation model economy of Campbell and Cochrane ~1999! can explain why the Capital Asset Pricing Model ~CAPM! and its extensions are better approximate asset pricing models than is the standard consumptionbased model. The model economy produces time-varying expected returns, tracked by the dividend--price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture. Therefore, though the consumption-based model and CAPM are both perfect conditional asset pricing models, the portfolio-based models are better approximate unconditional asset pricing models. THE DEVELOPMENT OF CONSUMPTION-BASED ASSET PRICING THEORY ranks as one of the major advances in financial economics during the last two decades. The classic papers of Lucas ~1978!, Breeden ~1979!, Grossman and Shiller ~1981!, and Hansen and Singleton ~1982, 1983! show how a simple relation between consumption ...
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