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Sheep grazing is an important part of agriculture in the North Atlantic region, defined here as the Faroe Islands, Greenland, Iceland, Norway and Scotland. This process has played a key role in shaping the landscape and biodiversity of the region, sometimes with major environmental consequences, and has also been instrumental in the development of its rural economy and culture. In this review, we present results of the first interdisciplinary study taking a long-term perspective on sheep management, resource economy and the ecological impacts of sheep grazing, showing that sustainability boundaries are most likely to be exceeded in fragile environments where financial support is linked to the number of sheep produced. The sustainability of sheep grazing can be enhanced by a management regime that promotes grazing densities appropriate to the site and supported by area-based subsidy systems, thus minimizing environmental degradation, encouraging biodiversity and preserving the integrity of ecosystem processes.