How ESG Issues Become Financially Material to Corporations and Their Investors

36 Pages Posted: 8 Nov 2019 Last revised: 23 Nov 2020

See all articles by David Freiberg

David Freiberg

Harvard University - Business School (HBS)

Jean Rogers

Accounting Standards Board

George Serafeim

Harvard University - Harvard Business School

Date Written: November 4, 2020

Abstract

Management and disclosure of environmental, social and governance (ESG) issues have received substantial interest over the last decade. In this paper, we outline a framework of how ESG issues become financially material, affecting corporate profitability and valuation. We argue that understanding this process is important both for actors driven by financial or societal motives. The former group, which includes companies and return-first investors, can use the framework to make resource allocation decisions based on expectations about future materiality thereby enhancing risk-adjusted returns. The latter group, which includes regulators, NGOs, and impact-first investors, can use the framework to design and implement interventions that create market-based incentives for companies and investors to align their behavior with social and environmental outcomes.

Keywords: Sustainability Disclosure, Esg, Materiality, Social Impact, Corporate Valuation, Pharmaceutical Companies, Ethics, Business Ethics, Sustainability, Environment, Finance, Accounting, Disclosure, Disclosure and Access, Regulation, Valuation, Corporate Governance, Corporate Accountability

JEL Classification: M4, G1, G3, M14

Suggested Citation

Freiberg, David and Rogers, Jean and Serafeim, George, How ESG Issues Become Financially Material to Corporations and Their Investors (November 4, 2020). Harvard Business School Accounting & Management Unit Working Paper No. 20-056, Available at SSRN: https://ssrn.com/abstract=3482546 or http://dx.doi.org/10.2139/ssrn.3482546

David Freiberg

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Jean Rogers

Accounting Standards Board

United States

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

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