Is Materiality Key to Profit on Sustainability? An empirical analysis of material sustainability and its effect on stock performance on Oslo Stock Exchange

Abstract

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.