How material is a material issue? Stock returns and the financial relevance and financial intensity of ESG materiality

This paper investigates the role of the intensity and relevance ofESG materiality in equity returns. Adopting the classifications ofmateriality provided by the Sustainability Accounting StandardsBoard (SASB), the paper introduces the concept of thefinancialrelevance andfinancial intensity of ESG materiality in order toestimate how it explains equity returns. The results of theanalysis, based on a large sample of U.S. companies included inthe Russell 3000 from January 2008 to July 2019 show that notonly do ESG rating changes (ESG momentum) have a consistentimpact on equity performance, but also that the market seems toreward more those companies operating in industries with a highlevel of concentration of ESG materiality. The implication is thatthe equity premium of listed companies is better explained bythe concentration of material issues (i.e. the Gini index) than bythe ESG momentum.