How Material is a Material Issue? Stock Returns and the Financial Relevance and Financial Intensity of ESG Materiality.

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. compa-nies included in the Russell 3000 from January 2008 to July 2019 show that not only do ESG rating change (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 ESG materiality concentration. The impli-cation is that the equity premium of listed companies is better explained by the concentration of material is-sues (i.e., the Gini index) than by the ESG momentum.

Keywords: SASB, Nonfinancial Information, ESG Materiality, Financial Relevance of ESG Materiality, Financial Intensity of ESG Materiality, Fama-French, CAPM

JEL Classification: G11, G12, G14, C33, M14, D81