ESG and Corporate Financial Performance: A Discounted Cash-Flow Perspective with Sustainability Implications

Over the past two decades, researchers and practitioners alike have increasingly aimed to quantify the effects of corporate sustainable practices by studying the relationship between Environmental, Social, and Governance (ESG) metrics and corporate financial performance (CFP). This review employs the Discounted cash-flow (DCF) model to examine financial economics-based research on ESG factors, focusing on their impact on corporate performance through the lenses of cash-flow, idiosyncratic and downside risk, as well as systematic risk channels. The literature reveals four key mechanisms through which ESG characteristics in- fluence CFP, mapped within the numerator (cash-flow) and denominator (discount rate) com- ponents of the DCF framework. The link between ESG and cash-flow is examined through analyses of corporate ESG attributes and various financial profitability indicators. Firms with strong ESG performance demonstrate enhanced control over idiosyncratic risk via the cash- flow transmission channel. Additionally, the ESG–cost-of-capital link highlights how reduced systematic and downside risks contribute to improved financial performance. The reported results consistently point to a positive relationship between ESG performance and financial outcomes. This review underscores how ESG strategies not only signal financial strength but also promote alignment with the United Nations Sustainable Development Goals (SDGs). In particular, improved ESG performance supports SDG 8 (Decent Work and Economic Growth) by fostering resilient, long-term business models; SDG 12 (Responsible Consumption and Pro- duction) through corporate accountability; and SDG 13 (Climate Action) via environmental risk mitigation. These findings highlight ESG’s role as both a financial and sustainability lever, offering insights with far-reaching implications for policymakers, investors, and global sustainability partnerships (SDG 17).