Corporate SDG performance and the cost of equity capital

What the paper says

Purpose This paper aims to empirically investigate the impact of Sustainable Development Goals (SDGs) performance on the cost of equity for US companies. Design/methodology/approach This study analyzes a balanced panel of 337 US companies over the period 2015–2021. The authors use dynamic panel data analysis to examine the effect of SDG performance on the cost of equity. The main analysis relies on a system Generalized Method of Moments (GMM) estimator, which explicitly addresses endogeneity, persistence in the dependent variable and unobserved firm-specific heterogeneity. To improve methodological coherence and avoid redundancy, complementary estimations using Driscoll–Kraay standard errors are conducted to correct for cross-sectional dependence arising from common shocks. In addition, an alternative System-GMM specification is estimated, in which SDG performance is explicitly treated as endogenous and instrumented using a GMM-style approach, allowing for a more rigorous treatment of potential reverse causality. Findings The results consistently show a negative and statistically significant relationship between SDG performance and the cost of equity across all specifications. Firms with stronger sustainability performance benefit from lower equity financing costs, indicating that SDG engagement reduces perceived risk and improves firms’ risk profiles in capital markets. This evidence highlights the financial advantages of integrating sustainability into corporate strategies. Originality/value This study contributes to the growing literature on sustainability and corporate finance by providing robust empirical evidence on the financial benefits of SDG performance. The findings offer valuable insights for regulators, legislators, shareholders, creditors and practitioners, underscoring the importance of sustainability initiatives in improving both economic and environmental outcomes, while reducing the cost of equity.