How Stressing ESG Affects Firm Value

The intersection of business and sustainability has undergone a transformative shift in recent years. Once relegated to the periphery of corporate consciousness, environmental, social, and governance (ESG) factors are now at the forefront of companies’ strategic considerations. Yet they raise a pivotal question: How should organizations respond to investor demand for a heightened focus on ESG when empirical studies often reveal no clear financial benefits to ESG investments?

A recent Stanford University Hoover Institution survey revealed a fascinating insight into  ESG investing. It found that over one-third of investors under 50 were willing to sacrifice 11 percent to 15 percent of their retirement savings to back corporations focusing on such ESG issues as gender diversity. This willingness to potentially compromise financial security for ethical considerations suggest  decision-making driven more by the heart than by objective analysis and comprehensive research. While this may work for individual investors, such an approach is not an option for most institutional investors responsible for managing other people’s funds.  The regulatory landscape governing institutional investors places stringent demands on fiduciary duties. Their legal obligations are rigorous, and the chase for non-financial objectives can’t take precedence.

In a new article, we offer novel insights into the conundrum of ESG emphasis and present a conceptual framework for exploring the impacts on firm value of emphasizing both nonmaterial and material ESG factors.

Material vs. Nonmaterial ESG Factors

The distinction between material and nonmaterial ESG factors is fundamental to the framework. Material ESG factors are those whose exclusion from corporate disclosures would significantly affect the information available to a reasonable investor. In contrast, nonmaterial ESG factors, when omitted from disclosure, would not substantially alter the investor’s understanding of the company. However, understanding what is material or relevant can be complex because it is entity-specific, varying across industries and individual companies within those industries. Recognizing this challenge, the Sustainability Accounting Standards Board (SASB) has developed an industry-specific materiality map that covers 79 industries across 10 sectors and provides a reference point for determining materiality. For instance, in some industries, ESG risks are related to raw material sourcing, energy efficiency, and toxic emissions. In other sectors, they are related to labor management, employee safety, or product liability.

Deep Learning Insights

To understand the dynamics of material and nonmaterial ESG emphasis, we use a      deep learning model to analyze transcripts of earnings calls held by 6,700 firms from 2005 to 2021. This extensive dataset provides the foundation for estimating panel data models designed to test the proposed framework rigorously.

Revelations from the Analysis

  1. Nonmaterial ESG Emphasis: The analysis uncovers a striking finding – a mere 10 percent increase in nonmaterial ESG emphasis can lead to a significant 3 percent decrease in firm value. This unexpected negative impact on firm value surpasses the positive impact of material ESG emphasis by a factor of 2.12. These findings defy conventional wisdom and underscore the importance of considering the nuances of ESG factors.
  2. The Temporal Element: ESG emphasis is not static. Over time, the negative impact of nonmaterial ESG emphasis on firm value becomes more pronounced. This temporal evolution implies that the ESG dilemma intensifies as organizations try to satisfy stakeholders while delivering financial returns.
  3. Industry Regulation Matters: The research also highlights the significance of industry regulation. The negative impact of nonmaterial ESG emphasis on firm value is accentuated in regulated industries, suggesting that the regulatory environment plays a significant role in shaping the effects of ESG choices.

Empowering Executives and Investors

As an innovative addition to this research, we have developed an interactive application that can be useful for executives and investors. It enables them to compare companies with their competitors and quantifies the impact on firm value from changes in ESG emphasis. It empowers decision-makers to make informed choices about their ESG strategies and assess the implications for their organizations.


Our study challenges preconceived notions by revealing that nonmaterial ESG emphasis can have material consequences for firm value. The relationship between ESG and financial performance is far from straightforward, and this research provides a valuable perspective that legal professionals, academics, government officials, and journalists can use to navigate the ESG terrain.

In an era where sustainability and profitability are not mutually exclusive, the dynamic relationship between ESG factors and firm value warrants continued exploration. As investors, stakeholders, and regulators continue to emphasize the importance of ESG, this research invites us to think beyond traditional financial metrics and consider the multifaceted landscape of sustainability in a new light.

This post comes to us from Sonam Singh at the University of Texas at San Antonio’s Alvarez College of Business, Ashwin V. Malshe at the University of Texas at San Antonio, Yakov Bart at Northeastern University’s D’Amore-McKim School of Business, and Serguei Netessine at the University of Pennsylvania – The Wharton School. It is based on their recent article, “When Non-Materiality is Material: Impact of ESG Emphasis on Firm Value,” available here.