Corporate Sustainability: A Model Uncertainty Analysis of Materiality

For more than thirty years, scholars have investigated the connection between corporate sustainability and financial performance.  In 2016, Khan, Serafeim, and Yoon published what appeared to be a major breakthrough in this quest: guidance from the Sustainability Accounting Standards Board (SASB) enabled the formation of scales of sustainability measures that robustly predicted stock returns.  Their publication is widely interpreted as evidencing a real connection between corporate sustainability and financial performance, but remains, in its authors’ words, just “first evidence”.  In this article, we further explore the relationship between material-sustainability and stock return by performing a “model uncertainty analysis”.  We reproduce the 2016 estimate, but show it is both fragile to changes in assumptions and unrepresentative of results from most reasonable models.  We infer from the totality of our analysis, that for one popular source of data on corporate sustainability, accurate guidance on materiality may be difficult to achieve.