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;

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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).

Case | HBS Case Collection | January 2020 (Revised July 2020)

BlackRock: Linking Purpose to Profit

Rohit Deshpandé, Aiyesha Dey and George Serafeim

The case revolves around the actions that Barbara Novick, co-founder and Vice-Chair of Blackrock, and Michelle Edkins, Global Head of Investment Stewardship, would need to take in response to the controversial CEO letters from Laurence (Larry) Fink, Chairman and CEO of BlackRock. Fink’s letters focused on the importance of corporate purpose and investing considering environmental, social, and governance (ESG) issues. The case also discusses Blackrock’s plans for a new model of shareholder engagement to help drive the changes proposed in the letters. The case presents the opportunity to discuss the governance role played by major institutional investors as well as how the responsibilities and actions of one large investor, BlackRock, should evolve in this role going forward. It is not clear whether BlackRock should play such a role and, if so, whether they have the ability to enforce corporate compliance and to carry out this role given they are primarily an index investor. The case is likely to generate spirited debate about the merits of BlackRock’s pronouncements and the importance of corporate investments in ESG themes and allow for discussions on measurement and disclosure strategies that can judge progress on these dimensions.

Keywords: boards of directors; Institutional investors; disclosure; transparency; corporate purpose; Corporate profits; ESG; ESG disclosure metrics; corporate sustainability; engagement strategy of institutions; stewardship role of institutions; Corporate Governance; Governing and Advisory Boards; Institutional Investing; Accounting; Corporate Disclosure; Mission and Purpose; Profit; Environmental Sustainability; Climate Change; Diversity; Corporate Accountability;

Citation:

Deshpandé, Rohit, Aiyesha Dey, and George Serafeim. "BlackRock: Linking Purpose to Profit." Harvard Business School Case 120-042, January 2020. (Revised July 2020.) View Details

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Using data from a top-five global executive placement firm, the authors explore how an organization's financial misconduct may affect pay for former employees not implicated in wrongdoing. Drawing on stigma theory, they hypothesize that although such alumni did not participate in the financial misconduct and they had left the organization years before the misconduct, these alumni experience a compensation penalty. The stigma effect increases in relation to the job function proximity to the misconduct, recency of the misconduct, and an employee's seniority. Collectively, results suggest that the stigma of financial misconduct could reach alumni employees and need not be confined to executives and directors that oversaw the organization during the misconduct.

Human capital development (HCD) is a key consideration for most companies, but only recently have investors focused on understanding the risks and opportunities related to human capital with the emergence of environmental, social, and governance (ESG) investment frameworks and impact investing. We argue that the importance of human capital is likely to be magnified in an environment of rapid technological change, where the future of work is uncertain and that existing frameworks for measuring and evaluating HCD might not be fit for purpose. Against this backdrop, we derive an HCD metric that focuses on outcomes rather than inputs; demonstrate that even in the current disclosure landscape one could measure with reasonable accuracy this metric for thousands of companies; and provide exploratory evidence on its relationship with employee productivity. Moreover, we develop an estimate of probability of automation of job tasks for each sub-industry and show the relationship between this probability to elements of our HCD metric and other human capital characteristics. Finally, we outline an investor engagement framework to improve the disclosure landscape related to HCD and to empower effective investment stewardship.

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Corporate Sustainability: First Evidence on Materiality

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