Towards a Theory of Sustainable Finance

The paper proceeds as follows: It first outlines the dominant view of finance and notes some of its strengths and weaknesses. Thereafter it introduces and evaluates contemporary calls for either more regulation by the authorities or greater social responsibility by agents themselves. In light of current evidence with both of these suggestions, a new theory is presented which I tentatively call the two-level model of sustainable finance. Finally, the paper closes with a discussion on what the theory implies in terms of both adequate behaviour by financial agents themselves and effective regulation by the authorities. The main results are summarized at the end of the paper.