Sustainable Finance: ESG/CSR, Firm Value, and Investment Returns*

We review the burgeoning sustainable finance literature, emphasizing the value implications of ESG (environmental, social, and governance) and CSR (corporate social responsibility) practices. We use a discounted cash flow valuation framework to identify value drivers through which such practices can enhance firm value. Collectively, empirical evidence supports that they increase firm value by motivating employees, strengthening customer–supplier relationships, boosting long-term growth, increasing dividends, and reducing financing costs. Furthermore, more socially responsible firms deliver no higher excess stock returns in the long run. Green bonds neither provide issuers with a price premium nor make investors sacrifice on lower returns. Socially responsible investing (SRI) funds generate no higher risk-adjusted long-term returns than non-SRI funds. Finally, we briefly suggest several topics for future research on sustainable finance.