This paper delves into the intersection of behavioural economics through the lens of Prospect theory and environmental finance, focusing on how risk perceptions impact decision-making within the green economy. Prospect Theory, introduced by Kahneman and Tversky, elucidates the non-linear approach that individuals adopt when evaluating risky prospects, especially under loss aversion, framing, and subjective probability conditions. This study synthesizes theoretical underpinnings with empirical evidence, highlighting the implications of Prospect Theory in the environmental finance sector. Examining real-world case studies, we explore how the principles of risk perception shape investor behaviour, policy design, and market outcomes in green investments. Furthermore, the study offers critical insights into the role of cognitive distortions in steering the evolution of environmental finance as the world transitions to a low-carbon economy.