Corporate Sustainability: First Evidence on Materiality

Mozaffar  Khan; George  Serafeim; Aaron  Yoon

Article | Accounting Review | November 2016

Corporate Sustainability: First Evidence on Materiality

by Mozaffar Khan, George Serafeim and Aaron Yoon

Abstract

Using newly available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

Keywords: sustainability; Investments; corporate social responsibility; accounting; corporate reporting; regulation; Corporate Social Responsibility and Impact; Integrated Corporate Reporting; Investment; Corporate Governance;

Format: Print

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Citation:

Khan, Mozaffar, George Serafeim, and Aaron Yoon. "Corporate Sustainability: First Evidence on Materiality." Accounting Review 91, no. 6 (November 2016).

Organizations create significant positive and negative impacts through their employment practices. This paper builds on the substantial body of research regarding job quality and impact measurement to present a framework for monetized analysis of employment impact. We identify and propose a framework for measuring the four most salient dimensions of impact for employees, including wage quality, career advancement, opportunity, and health and wellbeing, as well as two principle impacts, diversity and employment location, for the broader labor community. The framework and methodology for calculating employment impact-weighted accounting figures is applied to several large corporations, resulting in positive impacts that range between 25 and 249% of their EBITDA suggesting significant heterogeneity in employment practices across organizations. These results demonstrate the feasibility of calculating employment impact in monetary terms, and provide a foundation for future application across additional geographies and contexts.

We apply the product impact measurement framework of the Impact-Weighted Accounts Initiative (IWAI) in two competitor companies within the consumer-packaged goods industry. We design a methodology that allows us to calculate monetary impact estimates on customer health, access and affordability of products and recyclability, among other factors. Our results indicate substantial differences in the impact that competitors have through their products. These differences demonstrate how impact measures reflect business strategy choices and informs decision-making on industry-specific areas, including food reformulation and product placement.

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Corporate Sustainability: First Evidence on Materiality

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