Corporate Sustainability: First Evidence on Materiality

by Mozaffar Khan, George Serafeim & Aaron Yoon

Overview — The relatively new class of corporate investments known as sustainability investments has attracted the attention of firms, institutional investors, academics, and societal advocacy groups. This paper examines in depth how such investments enhance value for shareholders. Results overall show that investments in material sustainability issues can be value-enhancing for shareholders while investments in immaterial sustainability issues have little positive or negative, if any, value implications.

Author 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.