RESEARCH ARTICLE Financial materiality in the informativeness of sustainability reporting Eduardo Schiehll 1 | Sam Kolahgar 2 1 HEC Montréal, Montréal, Quebec, Canada 2 Faculty of Business, University of Prince Edward Island, Charlottetown, Prince Edward Island, Canada Correspondence Eduardo Schiehll, HEC Montréal, 3000, Chemin de la Côte-Sainte-Catherine, Bureau 5509, Montréal, QC H3T 2A7, Canada. Email: eduardo.schiehll@hec.ca Funding information Autorité des marchés financiers, Grant/Award Number: SC-2691; Social Science and Humanities Research Council (SSHRC) of Canada, Grant/Award Number: 435-2018-1522 Abstract This study examines whether financial materiality in environmental, social, and gover- nance (ESG) disclosure benefits the stock market by increasing the amount of acces- sible and relevant firm-specific information. Based on the value relevance of information and the principle of financial materiality, we demonstrate that disclosing material ESG information increases stock price informativeness. We conduct an auto- mated content analysis of 150,000 electronic documents filed by firms listed on the S&P/TSX Composite Index from 1999 to the end of 2014. Our findings show that ESG disclosure is indeed value relevant for investors and that financial materiality in ESG disclosure leads to more informative stock prices. In addition, the effect of ESG disclosure on stock price informativeness differs across the ESG components, being more sensitive to the social component. This study contributes to the literature on sustainability reporting, and in particular to the ongoing discussion about whether the financial materiality of ESG issues matters. This study also deepens the under- standing of agency theory predictions about the economic effects of ESG disclosure. KEYWORDS agency theory, informativeness, materiality, sustainability reporting, voluntary disclosure 1 | INTRODUCTION This study examines whether financial materiality in the disclosure of environmental, social, and governance (ESG) information benefits the stock market by increasing stock price informativeness. Our investiga- tion is guided by two interrelated research questions: (a) Does enhanced ESG disclosure increase the informativeness of stock prices? and (b) Does financially material ESG disclosure improve stock price informativeness? Publicly traded firms face increasing pressure to disclose informa- tion about whether their operations are economically, socially, and environmentally sustainable. For example, according to KPMG reports, 84% of Canada's largest companies (by revenue) reported their ESG performance in 2017 (Blasco & King, 2017), 1 up from 60% in 2008 and 41% in 2005. Although financial information disclosure is mandatory to enable investors to assess firms' economic performance and is governed by strict accounting standards, ESG disclosure remains voluntary and uneven in Canada, and it involves several types of filings (Canadian Securities Administrators [CSA], 2010). A recent PricewaterhouseCoopers LLP (2019) survey demonstrates that inves- tors agree on the importance of ESG disclosure, but notes that firms are not providing relevant ESG information. The PwC report con- cludes that the information gap between ESG disclosures and investor demands is as wide as ever. This suggests that not only do investors still perceive ESG disclosure as lacking in reliability, comparability, and relevance but also firms seem to find it challenging to identify what information to disclose to what audience and for what purpose. We draw on two streams in the literature, the value relevance of information (Barth, Li, & McClure, 2018) and the materiality principle (Francis & Schipper, 1999; Khan, Serafeim, & Yoon, 2016), to further examine whether voluntary and financially material ESG disclosure provides investors with value relevant information. We use stock 1 KPMG, The road ahead: The KPMG Survey of Corporate Responsibility Reporting. 2017, 16. Received: 6 February 2020 Revised: 13 September 2020 Accepted: 28 September 2020 DOI: 10.1002/bse.2657 Bus Strat Env. 2020;1–16. wileyonlinelibrary.com/journal/bse © 2020 ERP Environment and John Wiley & Sons Ltd. 1