Is Materiality Key to Profit on Sustainability? An empirical analysis of material sustainability and its effect on stock performance on Oslo Stock Exchange
Master thesis
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https://hdl.handle.net/11250/3050369Utgivelsesdato
2022Metadata
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- Master Thesis [4209]
Sammendrag
In this thesis, we examine whether the companies’ focus and prioritization of material
sustainability issues have value implications for companies listed in Norway. Material
sustainability issues are those issues that are likely to influence the decision making of
stakeholders (Jørgensen, Mjøs, & Pedersen, 2022). We classify an investment as material or
immaterial by cross-checking MSCI’s key sustainability issues with SASB’s industry-specific
material issues. We construct portfolios based on i) companies with high (low) investments in
material and immaterial sustainability, and ii) based on relative sustainability performance. The
excess returns are then measured against the Fama French four-factor model. The methodology is
inspired by Khan, Serafeim & Yoon (2016).
When considering sustainability investments, we find that no significant abnormal returns are
present, regardless of the investments being material or immaterial. When examining the effect of
relative sustainability performance on stock performance, our results indicate that the relative
material sustainability performance does not create value for shareholders. However, the results
implies that a strong performance on immaterial sustainability is associated with a negative
annualized abnormal return of 1.2% compared to the low performers. Furthermore, we argue that the
five biggest sectors on Oslo Stock Exchange are affected differently by sustainability factors,
because of varying stakeholder pressure and different material issues. The sector portfolios
achieve a difference in annualized abnormal return ranging from -2.40% for the Extractives &
Mineral Processing sector to 3.60% for the Financial sector. To conclude, we argue that materiality
matters in the sense that continuous investments in immateriality, and thus becoming a
sector-leader, is value-destroying. The results suggests that the non- financial accounting
standards used in Norway are successful in separating material and immaterial issues for
investments purposes, and thereby highlight the importance of knowing which sustainability issues
to prioritize in the mission of aligning sustainability and profitability.