A study of the impact of investment in SDGs on corporate value enhancement in the chemical industry

Abstract

Since an investment in Sustainable Development Goals (SDGs) does not correspond to an investment in tangible assets, its real effects on corporate values are ambiguous. Thus, we examined the impact of corporate SDG initiatives on the weighted average cost of capital (WACC) of the companies listed in the First Section of the Tokyo Stock Exchange in the chemical industry. The analysis revealed a negative correlation between SDG initiatives and WACC. Further, we estimated the investment supply function via the instrumental variable method, employing the results of the linear discriminant analysisbased topic model of non-financial information based on the Annual Securities Report and Integrated Reports; we determined that "multiple awards for SDG disclosure," which is the recognition of a company's SDG efforts by society, lowered WACC. Put differently, we concluded that a proactive approach to SDGs, which explicitly states corporate social responsibility (CSR) in a business strategy, positively affected corporate values by shifting the investment supply function and lowering the hurdle rate (WACC).