Abstract
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.
Highlights
A recent and growing trend is the use of nonfinancial information to guide investment decisions
4.02; Morgan Stanley Capital International (MSCI) score = 4.23; p-value = 0.08% (
This study explores whether the consideration of financial materiality according to Sustainability Accounting Standard Board (SASB’s) financial materiality framework has a significant impact on firms’ ESG performance scores as provided by the rating agency MSCI in its MSCI ESG ratings database
Summary
A recent and growing trend is the use of nonfinancial information to guide investment decisions. A study of an international sample of investors revealed that in 2016, 68% of respondents frequently or occasionally considered firms’ extra-financial ESG performance to make investment decisions, an increase of 11% over 2013 [1]. Van Durren et al [2] demonstrated that many conventional fund managers integrate ESG information into their decision process. One explanation for this heightened interest in ESG performance is the positive correlation with firms’ financial performance, as demonstrated in metaanalyses [3,4]. Investors can obtain ESG information from a variety of sources, such as rating agencies and index providers. Experts advise both firms and rating agencies to focus more on material ESG issues that can directly affect the firm’s bottom line [1,5,6]
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