Theoretical foundations of energy finance: a multidimensional framework

Abstract

Energy has moved beyond its traditional role as a factor of production to become a central arena of financial activity, connecting global markets, investment practices, and policy design. This chapter reviews the conceptual and theoretical foundations of the energy–finance nexus, highlighting how financialization, systemic risks, and emerging green and digital finance mechanisms shape both market behavior and institutional responses. By drawing on neoclassical, Keynesian, behavioral, and complexity-based traditions, it develops a multidimensional framework that integrates economic, financial, technological, and political perspectives. The review shows that financialization tends to heighten volatility and market interconnectedness, while crises intensify the transmission of shocks across energy, carbon, and financial systems. Climate, geopolitical, and policy risks compound these vulnerabilities, influencing investment behavior, risk management, and governance structures. At the same time, green finance instruments, ESG investing, carbon markets, and digital platforms are beginning to transform the financial architecture that underpins the energy transition—although their effectiveness depends critically on consistent policy, strong governance, and inclusive frameworks. This synthesis demonstrates that the energy transition is inseparable from a financial transition. Effective policy design, risk mitigation, and equitable capital allocation are critical to aligning investment with sustainability objectives. By integrating theoretical perspectives and policy considerations, this chapter offers a roadmap for understanding the energy–finance nexus and informs future research and policymaking in the evolving global energy landscape.