When Nonmateriality is Material: Impact of ESG Emphasis on Firm Value

Abstract

This study examines the presence and the impact of emphasizing nonmaterial ESG factors on firm value. ESG factors are considered nonmaterial (or material) when excluding them from corporate disclosure would not (or would) significantly alter the overall information available to a reasonable investor. Drawing on agency theory, the authors argue that managers may divert their attention from firm value-maximizing activities by emphasizing nonmaterial ESG factors to enhance their reputations. The authors measure ESG emphasis by applying a deep learning model to earnings call transcripts of 5,079 firms from 2005 to 2021. They demonstrate that, on average, managers emphasize nonmaterial ESG issues more than material ESG issues. Furthermore, they find a positive association between nonmaterial ESG emphasis and media mentions of the firms. Notably, a 10% higher emphasis on nonmaterial ESG factors leads to a significant 10.7% decline in firm value. This negative association intensifies over time, is stronger for firms with higher free cash flow, and is weaker for firms with higher market share. Finally, the authors develop an interactive web app (https://bit.ly/esg_app) to assist executives and investors in comparing companies against competitors and quantifying the impact of shifting ESG emphasis on the firm value.

Keywords: ESG, firm value, material, nonmaterial, deep learning, ESG-BERT, earnings call

JEL Classification: M31, M14