Understanding the Business Relevance of ESG Issues

There is a growing interest to understand the business relevance of ESG issues, especially those related to the firm performance. We propose a framework to better understand the relationship between true and observed materiality and outline the associated measurement errors, which reflect the complex, nuanced and time evolving nature of the underlying construct as well as the ESG data. Our framework calls for researchers to consider the different types of measurement errors with care, because the choices made could exacerbate or mitigate the relationship between true and observed materiality. Overall, our framework has implications to the emerging stream of literature that assesses the business relevance of ESG issues.