Materiality and investor reaction to environmental corporate social responsibility : A replication and extension of Flammer (2013)

Abstract Research Summary We replicate and extend Flammer's (2013) event study of investor reaction to environmental corporate social responsibility. Flammer found that investors react positively to eco‐friendly events and negatively to eco‐harmful events, with positive reactions diminishing and negative reactions intensifying from 1980 to 2009. We confirm her results in a narrow replication and find that these time trends persist in a quasi‐replication extending the sample through 2019, despite major shifts in the institutional environment for sustainability investing. We then extend Flammer by incorporating financial materiality and find that the investor reactions and time trends Flammer observed are primarily concentrated in material events. Notably, investors drew this distinction throughout the 40‐year window we study, predating the institutionalization of materiality‐based sustainability analysis. Managerial Summary We examine how investors respond to companies' environmental actions. Analyzing 40 years of data on US‐listed public firms, we find that investors reward companies for eco‐friendly actions and penalize them for harmful ones. Over time, these reactions have shifted: investors have grown less enthusiastic about eco‐friendly actions and more critical of harmful ones. Importantly, investors react primarily to environmental actions that are financially relevant, or “material,” to the business and were doing so well before formal standards existed. Within material actions, positive reactions to eco‐friendly initiatives have weakened while negative reactions to eco‐harmful ones have grown stronger. These findings suggest that managers should prioritize environmental initiatives closely tied to their company's financial performance.