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The Role of Sustainable Finance in Market Stability

In: Following the Crowd: Psychological Drivers of Herding and Market Overreaction

Author

Listed:
  • Kok Loang Ooi

    (Universiti Malaysia)

  • Norazlin Binti Ab Aziz

    (Universiti Malaysia)

  • Wee Yeap Lau

    (Universiti Malaysia)

Abstract

This chapter critically examines the role of sustainable finance in strengthening market stability and reducing systemic risks in contemporary financial systems. It builds on the growing recognition that the pursuit of short-term profit often undermines long-term economic resilience, and explores how the integration of environmental, social, and governance (ESG) principles into investment practices and regulatory frameworks can counteract speculative behaviour and cyclical volatility. The analysis evaluates both the theoretical foundations and the empirical evidence supporting sustainable finance as a stabilising force, drawing insights from recent financial crises, including the 2008 global economic collapse and the COVID-19 shock, where ESG-oriented strategies demonstrated comparatively robust performance. Grounded in frameworks, such as Modern Portfolio Theory, Stakeholder Theory, and the Market Efficiency Hypothesis, this chapter outlines how ESG integration reshapes the risk–return profile and strengthens portfolio resilience against non-financial externalities. It also investigates the influence of institutional investors in embedding sustainability norms and assesses the extent to which their evolving fiduciary priorities foster long-term market stability. This chapter concludes with a critical discussion on the necessity of harmonised regulation, enhanced ESG data integrity, and the advancement of policy instruments to ensure that sustainable finance contributes effectively to enduring market robustness.

Suggested Citation

  • Kok Loang Ooi & Norazlin Binti Ab Aziz & Wee Yeap Lau, 2025. "The Role of Sustainable Finance in Market Stability," Springer Books, in: Following the Crowd: Psychological Drivers of Herding and Market Overreaction, chapter 0, pages 209-220, Springer.
    • Handle: RePEc:spr:sprchp:978-981-95-0792-4_16
    DOI: 10.1007/978-981-95-0792-4_16
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