The Materiality Challenge of ESG Ratings

Abstract Research purpose. The ESG literature supports a positive correlation between a firm’s ESG performance and its financial performance; however, the details of this relationship are ambiguous, which has led to conflicting results in the literature. This article asserts that this ambiguity is largely related to the fact that ESG studies rarely consider the important issue of materiality. This article is an expanded replication of analysis by Williams ---amp--- Apollonio (2022), a study that called for deeper analysis of both materiality and the causal link between ESG ratings and financial performance. Design / Methodology / Approach. This methodology calculates Pearson Correlation coefficients between Bloomberg ESG scores and abnormal returns for S---amp---P 500 firms from 2020 to 2022 after controlling for the material issue of GICS sectors. Findings. The results show no relationship between ESG scores and abnormal returns, and the conclusion is that controlling for GICS sectors is not the methodology that will clarify the presumed positive correlation between ESG performance and financial performance. Originality / Value / Practical implications. This study is one of the few that addresses materiality in ESG ratings. The finding that controlling for GICS sectors does not sufficiently control for materiality is a significant building block for future researchers. This article suggests that more granular categorization of sub-industries using a larger sample than the S---amp---P 500 is likely to be useful future research.