Corporate Sustainability: First Evidence on
Materiality
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Khan, Mozaffar N., George Serafeim, and Aaron Yoon. "Corporate Sustainability: First Evidence
on Materiality." Harvard Business School Working Paper, No. 15-073, March 2015.
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Corporate Sustainability: First
Evidence on Materiality
Mozaffar Khan
George Serafeim
Aaron Yoon
Working Paper 15-073
Working Paper 15-073
Copyright © 2015 by Mozaffar Khan, George Serafeim, and Aaron Yoon
Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may
not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.
Corporate Sustainability: First Evidence
on Materiality
Mozaffar Khan
Harvard Business School
George Serafeim
Harvard Business School
Aaron Yoon
Harvard Business School
1
Corporate Sustainability: First Evidence on Materiality
Mozaffar Khan, George Serafeim, and Aaron Yoon
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.
Mozaffar Khan is a visiting Associate Professor at Harvard Business School. George Serafeim is the Jakurski
Family Associate Professor of Business Administration at Harvard Business School. Aaron Yoon is a doctoral
student at Harvard Business School. We are grateful for comments from seminar participants at National University
of Singapore and Harvard Business School. We are grateful for financial support from the Division of Faculty
Research and Development at Harvard Business School. George Serafeim has served on the Standards Council of
SASB. Contact emails: mkhan@hbs.edu; gserafeim@hbs.edu; ayoon@hbs.edu.
2
1. Introduction
Corporate investment policies are a key determinant of firm value and continue to be widely studied in
the literature. Multiple studies have investigated different types of investments and how these relate to
future financial performance. A relatively newer class of corporate investments, broadly termed
sustainability investments, has attracted the attention of firms, institutional investors, academics, and
societal advocacy groups. Are such corporate investments ultimately value-enhancing for shareholders? A
number of studies have investigated this question but the results remain mixed. One potential reason for
the mixed results is that no prior paper has distinguished between sustainability issues that are material for
a company versus all other less material sustainability issues (which we refer to as “immaterial”
throughout the rest of the paper). Investments in immaterial issues are less likely than investments in
material issues to be value-enhancing, and it therefore becomes important in testing the value implications
of such sustainability investments to distinguish between investments in material versus immaterial
issues. We respond to this gap in the literature.
A large number of companies now identify sustainability issues as strategically important and
release a wealth of information in the form of environmental, social and governance (ESG) data.
However, the materiality of the reported sustainability investments for firm value is regularly questioned,
with companies releasing an increasing amount of information that might be immaterial from an
investment standpoint.
1
Similarly, an increasing number of investors commit to the integration of ESG
data in their capital allocation process, but which of these ESG data should be taken into consideration is
still a point of tension.
The importance of the different sustainability issues likely varies systematically across firms and
industries (Eccles and Serafeim 2013).
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As such, the efforts of many organizations providing guidance on
1
See for example http://www.corporatesecretary.com/articles/compliance-ethics-csr/12425/sasb-previews-
sustainability-standards-financials/
2
See for example United Nations Environment Program Finance Initiative and World Business Council for
Sustainable Development. 2010. Translating environmental, social and governance factors into sustainable business
value http://www.unepfi.org/fileadmin/documents/translatingESG.pdf.