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Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (for example, pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology.

CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an ESG factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

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This paper will appear in the Oxford Research Encyclopedia of Economics and Finance.

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