Capital Market Effects of ESG Materiality Standards

We investigate the capital market reaction in response to the publication of the Sustainability Accounting Standards Board’s (SASB) standards on the financial materiality of environmental, social, and governance (ESG) issues. Based on the argument that accounting mechanisms impact perceptions through precision, we expect the SASB standards’ classifications of ESG items as either financially material or financially immaterial to impact investors’ assessments of firms. We employ a pooled event study exploiting the staggered release of the sector-specific standards from 2013 to 2016. We find a negative capital market reaction following the standards’ publication for firms with low material ESG performance and a positive capital market reaction for firms with high material ESG performance. The reaction is stronger, in both magnitude and significance, for low-performing firms. Our findings indicate that voluntary non-financial accounting standards influence investors’ perceptions about firm value.