Financial sustainability is underrepresented in both the research on and practice of
sustainability management and reporting. This article proposes a conceptual measure of fnancial sustainability and examines its association with capital market
returns. The measure is positioned at the intersection of sustainability management,
risk management and risk governance. Financial sustainability is regarded as a crucial control parameter complementing shareholder value and can be viewed by riskaverse investors as a secondary condition of investment decisions. It reduces refnancing and insolvency risks, leading to risk-adjusted excess returns in an imperfect
capital market with fnancing restrictions and insolvency costs. We propose measuring a frm’s fnancial sustainability in terms of four conditions: (1) frm growth,
(2) the company’s ability to survive, (3) an acceptable overall level of earnings risk
exposure, and (4) an attractive earnings risk profle. We show that the application of
a conditions-based investment strategy to European frms with high fnancial sustainability (i.e., frms fulflling all four conditions) over the period from July 1990 to
June 2019 results in monthly excess returns of 0.39%. This portfolio’s risk is lower
than the risk of market investment. We fnd that the excess returns increase when
incrementally adding each of the four conditions to the investment strategy.