Practical analysis for investment professionals
07 July 2015

ESG: A Material Information Advantage

Conventional wisdom suggests that sustainable investing doesn’t add alpha, right?

Wrong! Harvard researchers have found new evidence linking performance on sustainability issues to stock performance. Mozaffar Khan, George Serafeim, and Aaron Yoon from Harvard Business School present their findings in “Corporate Sustainability: First Evidence on Materiality (Working Paper 15-0703).” Importantly, this new research differentiates between material and immaterial sustainability factors — addressing a significant gap in prior research.

A major finding is that firms with good performance on material sustainability issues, using the Sustainability Accounting Standards Board (SASB) framework, and concurrently low performance on immaterial issues have the best future stock performance — generating an annualized alpha of 6.01%. In short, these results point to the efficiency of firms’ sustainability investments as highlighted below:


Source: SASB: Industry-Based Standards to Guide Disclosure and Action on Material Sustainability
Information Slide 22 (2015).

These results illustrate the importance of firms distinguishing among the types of sustainability investments they make. First, the best returns go to firms that only make investments in material sustainability issues while avoiding investments in immaterial issues (6.01% alpha). And, more importantly, firms that make no sustainability investments have the worst performance, with an estimated alpha of -2.90%.

The authors correctly point out that a large number of companies are now identifying sustainability issues as strategically important, and are releasing a wealth of new environmental, social, and governance (ESG) data. Also, investors are increasingly committing to using ESG data within the investment decision-making process. But, as investors, knowing exactly which ESG data to focus on can be difficult.

So what’s the big deal? Access to material sustainability information can help investors and asset managers generate alpha.

Access to Material ESG Information

In the Harvard study, the data collection process was driven based on materiality guidance on sustainability issues from SASB. The SASB website provides a sector-level materiality map that identifies sustainability issues by level of materiality. In short, this map is a great starting point for identifying which issues are likely to be material for more than 50% of the industries in the sector. The Harvard researchers then used MSCI KLD as the source of their sustainability data — which they cite as the most widely used dataset by past studies (7).

SASB sustainability issues are organized under the following five categories: Environmental, Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance. For example, the Environmental category contains issues such as greenhouse gas (GHG) emissions, air quality, energy management, fuel management, water and wastewater management, waste and hazardous materials management, and biodiversity impact.

After identifying material issues, the SASB Standards Navigator can be used to research specific “evidence-based metrics” that are known to impact business value in the areas of revenue, costs, assets, liabilities, and cost of capital. Each SASB accounting metric has a unique reference number, description, and a clearly defined unit of measurement. Bottom line: it is all about analyzing the right non-financial ESG metrics that have a material impact on financial performance.

SASB standards can be downloaded, at no charge, for a variety of sectors and industries. In addition, MSCI ESG Research sells a comprehensive suite of ESG data, ratings and research products.

It’s my hope that more access to high-quality and material ESG information will improve the investment decision-making process, increase business competition and lead us to a more sustainable future.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Robert R. Mudra, CFA

Robert R. Mudra, CFA is a senior-level financial, regulatory, and investment executive with deep expertise in the energy/utility industry. Mudra drives investment growth by consulting and publishing on energy and sustainable, responsible, and impact investing (SRI) while providing comprehensive analysis of environmental, social, and governance (ESG) issues. He currently serves on the Foundation Board of Directors for Marianjoy Rehabilitation Hospital in Wheaton, Illinois.

9 thoughts on “ESG: A Material Information Advantage”

  1. Robert F. Boyd, CFA says:

    Nice work.


  2. Adam Fleck, CFA says:

    Nice work–agree that the HBS study is interesting, and that SASB is an important driver in helping companies communicate important ESG metrics effectively.

    1. Adam,

      Thanks for your comments! I really appreciate the work you’re doing at Morningstar on ESG and the role you’re playing on panel discussions across the industry such as the recent ESG Summit. Keep leading the charge with the SASB integration committees!



  3. Jeff says:

    The people making the Kool-aid drink the Kool-aid and agree that it is good.

    Rather than being a cheerleader, how about applying a bit of analysis to this whole business and producing an intelligent, insightful piece of analysis.


    Stop hiding behind your credential and do a bit of work.

    1. Will Ortel says:

      Hi Jeff —

      Many thanks for reading the Enterprising Investor! I’m sorry you didn’t like the article, but we stand behind it. I’d love to go over any substantive criticisms you may have though — please feel free to shoot me a note at [email protected].

      Thanks again for reading —


  4. Joseph Martin says:

    Excellent write up.

  5. Justin Anderson says:

    How are “changes in materiality” calculated for each firm? Use an example.

  6. Thanks for publishing the latest research, which builds on previous Harvard and Oxford research of how value is created from ESG. Also, firms like Sustainalytics, TruCost and Oekom and my firm HIP Investor have shown connections of ESG to future risk, expected return, Sharpe Ratios and Alpha Generation from material drivers of value creation… over the past 8 years. HIP also now rates 9000 issuances of govt and NGO muni bonds as well. The Rhode Island CPA Society now has a Sustainable Value Committee as well. Glad we can all see more clearly that a more resilient and stronger portfolio results from building a better world.

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