Analysis of Impacts of SDGs Activities on Firm Value and Utility

Abstract

Previous empirical research papers suggest that CSR, ESG, and SDGs might have positive impacts on the firm value (Khan, Serafeim, and Yoon 2016 etc.) while a plethora of papers also suggest that some CSR and ESG factors have no or negative impact on the firm value (Kawamura and Nagata 2016 etc.). We analyze the impact of SDGs on the firm value by theoretical analysis distinguishing the firm value as cash-based value which is derived from the Discount Cash Flow method incorporating the magnitude of cash flow, market risk, and life span of the corporation, and recognized value derived by considering the investors' utility to SDGs contribution in addition to cash-based value. Our analysis suggests that firm's contribution to SDGs have positive impact on the firm value if it could increase the investor base, that is, SDGs could improve the recognized firm value. However, if the investors and shareholders care both SDGs contribution and the firm value, the cash-based firm value might be compensated. Mixed empirical results are consistent with our models because the positive impact of SDGs on the firm value via increment in investor base might be offset by the destruction of the cash-based firm value by the excessive investment to SDGs. In order to reach conclusion whether SDGs have positive impact on the firm value, we need to conduct more careful analysis constructing the SDGs index associated with the SDGs contribution by the firm. Additionally, our analysis suggests that if we desire to achieve SDGs at higher level, we need to understand the utility of investors and shareholders and consider the scheme providing the incentives for managers in order to make them maximize the utility of shareholders who care both SDGs and the firm value.

An Analysis of the Progress of Japanese Companies’ Commitment to the SDGs and Their Economic Systems and Social Activities for Communities

“…Regarding this factor, it makes sense that companies with good corporate performance can afford to start working on SDG initiatives. This result supports the idea of a positive relationship between corporate commitment to the SDGs and corporate value [32,36,37].…”

“…These results suggest that large companies with high profitability and social activity levels are early adopters of the SDGs. Furthermore, these results not only support the idea of a positive relationship between corporate SDG efforts and corporate value [32,36,37], as well as one between the SDG efforts and social activity but also show the clear cause-and-effect relationship between the SDG efforts, financial performance and social activity.…”

“…These results suggest that large companies with high profitability and social activity levels are early adopters of the SDGs. Furthermore, these results not only support the idea of a positive relationship between corporate SDG efforts and corporate value [32,36,37], as well as one between the SDG efforts and social activity but also show the clear cause-and-effect relationship between the SDG efforts, financial performance and social activity. The reasons for these results include (1) the tendency to which large companies receive requests for action from stakeholders due to their size, (2) the abundance of human and financial resources in large companies and their capacity to take action due to high profitability, and (3) a high level of awareness of social contribution activities.…”

“…Gneiting and Mhlanga [35] challenge the assumption that business is making significant contributions to the SDGs based on their survey of 70+ of the world's largest companies. Regarding research on Japanese companies, Ito [36] theoretically analyzed the impact of the SDGs on corporate value and found that corporate SDG contributions can positively affect the corporate value if they increase companies' investor bases, i.e., increase the value of SDG-recognized companies. Ishii [37] conducted an analysis of 11,275 companies and found that the profitability (ROA and ROE) of companies working on SDG initiatives tends to be higher than that of companies in general.…”