ESG and Firm Value: A Literature Overview and Valuation Approach

Abstract

This study provides a comprehensive review of recent research on the impact of Environmental, Social, and Governance (ESG) factors on corporate value and examines how ESG considerations can be integrated into traditional valuation models. Using a comparative synthesis of prior empirical and theoretical studies, the paper identifies key mechanisms through which ESG influences firm value, including expected cash flow, cost of capital, and intangible assets. Findings reveal that while ESG performance generally enhances firm value, the direction and magnitude of its effects vary substantially across industries and markets. The study also reviews major valuation approaches, including the income-based (with a focus on the discounted cash flow model), market-based, cost-based, and emerging hybrid models, all used to quantify ESG’s financial implications. Despite the growing academic and professional interest in ESG valuation, empirical evidence shows a lack of standardization in data quality, model structure, and estimation techniques. By synthesizing existing knowledge and identifying key methodological gaps, this paper opens new avenues for future research on integrating ESG metrics into corporate valuation frameworks, aiming to enhance the reliability and comparability of ESG-related valuation practices.