ESG materiality and firm performance

Details

Supervisors

Shrestha, Prabal

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

Academic literature finds that ESG performance positively impacts a company’s profitability and market value but discussions on the underlying mechanisms leading to this impact remain. This thesis analyses the relationship between ESG and financial performance distinguishing between material and immaterial ESG issues. A linear regression analysis of ESG sentiment data and accounting- and market-based financial performance indicators reveals that material ESG sentiment does not significantly correlate with market-based financial performance. However, immaterial ESG sentiment shows a positive correlation with a company’s market value. The study highlights potential limitations in using SASB’s industry-specific materiality classification, as this may not be able to fully capture company-specific characteristics and temporal dynamics. Additionally, the emphasis on short-term financial benefits in material ESG investments may inhibit the creation of long-term market value. Stakeholder perceptions also play a role, as material ESG disclosures may draw attention to negative impacts. These insights have implications for regulators, investors, and executives, pointing to the need for more relevant financial materiality classifications and offering directions for future research on ESG and financial performance.