Detecting Corporate ESG Performance : The Role of ESG Materiality in Corporate Financial Performance and Risks

This study investigates the impact of material ESG issues on firm performance and risks. Following the guidance of the Sustainability Accounting Standards Board (SASB), this study identifies the materiality ESG score of a firm (SASB ESG Score). The SASB ESG Score and the ESG Disclosure Score are therefore compared in terms of the impact of the financial performance and financial risks. Empirical findings demonstrate that a firm’s SASB ESG Score is positively associated with its financial performance and negatively associated with its financial risks, while the ESG Disclosure Score fails to predict a firm’s financial performance and risks. In addition, the effect of the SASB ESG Score on risk reduction is mainly attributed to the reduction of the firm-specific risk. Moreover, the results of the piecewise regression indicate that only firms with a better rank of SASB ESG Score can obtain better financial performance and lower financial risks. Therefore, to improve financial performance and risk control, firms are suggested to focus on their corresponding material ESG issues rather than the general ESG issues