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Huy Pham and Vikash Ramiah

Environmental economics and accounting are well-established disciplines but environmental finance is in its infancy. In this chapter, we explore how the lessons learnt from economics and accounting literature can be extended to the finance discipline. For instance, the macroeconomic literature suggests that environmental regulations affect employment level, international trade and productivity, which in turn affect the market portfolio/systematic risk. The microeconomics literature implies that the cost and revenue functions of firms are altered – leading to a change in stock prices. The accounting literature focuses on environmental disclosure/performance, which subsequently leads to a change in the market value of the firm. The emerging finance literature shows the persistence of the ‘green effect’ and a risk-shifting behaviour in terms of the diamond risk structure.

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Imad Moosa and Vikash Ramiah

While it is customary to deal with environmental regulation and financial regulation separately as if they are not related, we depart from this tradition by demonstrating that the generic theories of regulation are applied to environmental and financial regulation. We suggest that the arguments for and against regulation are equally valid for both, and so is the principle that regulation is a response to market failure. We also argue that it is not only that environmental regulation is relevant to sustainability but that financial regulation is also relevant. We consider the issues of integrating sustainability criteria in the risk assessment and decision making of financial institutions and how financial regulation can help mobilize capital for sustainability, arguing that financial stability affects and is affected by sustainability.