Material Sustainability Information and Stock Price Informativeness

Jody  Grewal; Clarissa  Hauptmann; George  Serafeim

Article | Journal of Business Ethics | Forthcoming

Material Sustainability Information and Stock Price Informativeness

by Jody Grewal, Clarissa Hauptmann and George Serafeim

Abstract

As part of the SEC’s revision of Regulation S-K, many investors proposed the mandatory disclosure of sustainability information in the form of environmental, social, and governance (ESG) data. However, progress is contingent on collecting evidence regarding which sustainability disclosures are financially material. To inform this issue, we examine materiality standards developed by the Sustainability Accounting Standards Board (SASB). We find firms voluntarily disclosing more SASB-identified sustainability information have higher stock price informativeness. In contrast, sustainability disclosures not identified as material by SASB are not associated with informativeness. Our result is robust to including controls for sustainability performance ratings, analyst forecasts, insider trading, institutional ownership, earnings quality, and other voluntary disclosure activity. Changes in material sustainability disclosure are followed by changes in stock price informativeness. Differences-in-differences estimates suggest that following the release of SASB standards, the treatment group of firms increased SASB-identified sustainability disclosure relative to the control group of firms and that the treatment group experienced an increase in stock price informativeness. The results are stronger for firms with higher exposure to sustainability issues, greater institutional and socially responsible investment fund ownership, and coverage from analysts with lower portfolio complexity. Moreover, we document intra-industry information transfers to firms with low SASB-identified sustainability disclosure in industries where firms have higher SASB-identified sustainability disclosure.

Keywords: Voluntary Disclosure; accounting standards; sustainability; nonfinancial information; corporate social responsibility; stock price informativeness; synchronicity; Environmental Sustainability; Corporate Disclosure; Corporate Accountability; Stocks; Price; Corporate Social Responsibility and Impact; Accounting; Standards;

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Grewal, Jody, Clarissa Hauptmann, and George Serafeim. "Material Sustainability Information and Stock Price Informativeness." Journal of Business Ethics (forthcoming).

Jarrid Tingle and Henri Pierre-Jacques had spent the summer between their first and second years of their MBA program fund raising for their start-up venture capital (VC) firm, Harlem Capital Partners. Harlem Capital was founded upon the principle that addressing the VC funding gap for minorities and women—who received only 3% of total VC funding—could produce superior returns. Tingle and Pierre-Jacques were passionate about the mission of Harlem Capital to change the face of entrepreneurship. However, despite generating significant media attention, Harlem Capital had only raised a few million dollars over the summer, not nearly enough for the fund to be financially viable as a career path for Tingle and Pierre-Jacques. Should Tingle and Pierre-Jacques commit to Harlem Capital despite the serious roadblocks on their path? Or should they capitalize on their pre-MBA private equity experience and attempt to be impactful through a more traditional career post-MBA graduation?

We develop a methodology that calculates the impact that organizations have on the environment through their water consumption relating to water stress risk. Using the methodology, we derive estimates for four companies that show how assumptions on the geographic location of the water withdrawal and use of different prices for water across geographies lead to variation in these estimates. We conclude with a framework guiding a user to understand the conditions under which a methodology might lead to over- or underestimation of water costs.

Article | Foundations and Trends® in Accounting | 2020

Research on Corporate Sustainability: Review and Directions for Future Research

Jody Grewal, George Serafeim, Jody Grewal and George Serafeim

We review the literature on corporate sustainability and provide directions for future research. Our review focuses on three actions: measuring, managing and communicating corporate sustainability performance. Measurement is the least developed of the three and represents promising opportunities for research. Compelling evidence now exists on the role of management control systems, investor pressure and mandated disclosure in improving corporate sustainability outcomes. Research has moved beyond weighing the importance of all sustainability issues equally, with recent studies drawing distinctions between the financial materiality of different sustainability issues. Collectively, this new line of inquiry suggests that improving performance on material sustainability metrics is related to improved financial performance, helping to resolve four decades of inconclusive evidence on the relation between sustainability and financial outcomes. Finally, we review research on how disclosure mediums, accounting standards, information monitors and intermediaries shape the communication of sustainability performance. We conclude with a call for research on how to measure performance in the 21st century when corporate purpose extends beyond shareholder value maximization.

Keywords: sustainability; sustainability reporting; Sustainability Management; nonfinancial disclosure; nonfinancial information; nonfinancial performance; materiality; ESG; ESG (environmental, social, governance) performance; ESG (environmental, social, governance) performance; ESG disclosure; ESG disclosure metrics; ESG ratings; ESG reporting; inequality; corporate social responsibility; Accounting; Finance; Management; Strategy; Environmental Sustainability; Climate Change; Diversity; Equality and Inequality; Corporate Disclosure; Measurement and Metrics; Corporate Governance; Corporate Accountability; Corporate Social Responsibility and Impact;

Citation:

Grewal, Jody, and George Serafeim. "Research on Corporate Sustainability: Review and Directions for Future Research." Foundations and Trends® in Accounting 14, no. 2 (2020): 73–127. View Details

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Material Sustainability Information and Stock Price Informativeness

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