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The power of ESG transparency: The effect of the new SFDR sustainability labels on mutual funds and individual investors

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  • Becker, Martin G.
  • Martin, Fabio
  • Walter, Andreas

Abstract

This paper analyzes the effect of the Sustainable Finance Disclosure Regulation (SFDR) on mutual funds and individual investors in the EU. First, we study whether affected funds increase their sustainability compared to a control group. Second, we examine if the regulation makes individual investors allocate more capital into more sustainable funds. In a difference-in-differences setting, we analyze the influence of the regulation on ESG fund scores and fund net inflows. Our results show that affected funds increase their sustainability rating after the policy intervention. Additionally, we find that a better ESG label leads to larger fund net inflows.

Suggested Citation

  • Becker, Martin G. & Martin, Fabio & Walter, Andreas, 2022. "The power of ESG transparency: The effect of the new SFDR sustainability labels on mutual funds and individual investors," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000332
    DOI: 10.1016/j.frl.2022.102708
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    3. Pandey, Dharen Kumar & Kumari, Vineeta & Palma, Alessia & Goodell, John W., 2024. "Impact of ESG regulation on stock market returns: Investor responses to a reasonable assurance mandate," Finance Research Letters, Elsevier, vol. 64(C).
    4. Richard Bofinger & Simon Cornée & Ariane Szafarz, 2024. "When in Rome, Do as the Romans Do: Disclosure Regulation and ESG Fund Management by Social and Conventional Banks," Working Papers CEB 24-003, ULB -- Universite Libre de Bruxelles.
    5. Hervé, Fabrice & Marsat, Sylvain, 2024. "Acting for good, being good or feeling good? Exploring factors influencing individual investors’ willingness to invest in green funds," Finance Research Letters, Elsevier, vol. 67(PA).
    6. Hebah Shalhoob & Khaled Hussainey, 2022. "Environmental, Social and Governance (ESG) Disclosure and the Small and Medium Enterprises (SMEs) Sustainability Performance," Sustainability, MDPI, vol. 15(1), pages 1-18, December.
    7. Auzepy, Alix & Bannier, Christina E. & Gärtner, Florian, 2024. "Looking beyond ESG preferences: The role of sustainable finance literacy in sustainable investing," CFS Working Paper Series 719, Center for Financial Studies (CFS).
    8. Banerjee, Rhythm, 2024. "Shifting Tides: the Effect of Institutional Divestments on the Global Market," MPRA Paper 121922, University Library of Munich, Germany, revised 11 Apr 2024.
    9. Ren, Xiaohang & Li, Jingyao & He, Feng & Lucey, Brian, 2023. "Impact of climate policy uncertainty on traditional energy and green markets: Evidence from time-varying granger tests," Renewable and Sustainable Energy Reviews, Elsevier, vol. 173(C).
    10. Pineau, Edouard & Le, Phuong & Estran, Rémy, 2022. "Importance of ESG factors in sovereign credit ratings," Finance Research Letters, Elsevier, vol. 49(C).
    11. Fabrice Hervé & Sylvain Marsat, 2023. "Eco-Anxiety, Connectedness to Nature & Green Equity Investments," Post-Print hal-04150758, HAL.
    12. Hervé, Fabrice & Marsat, Sylvain, 2024. "Like daughter, like father: Female socialization and green equity investment," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    13. Simona Cosma & Paolo Cucurachi & Vincenzo Gentile & Giuseppe Rimo, 2024. "Sustainable finance disclosure regulation insights: Unveiling socially responsible funds performance during COVID‐19 pandemic and Russia–Ukraine war," Business Strategy and the Environment, Wiley Blackwell, vol. 33(4), pages 3242-3257, May.
    14. Nadine Gatzert & Anna Kraus, 2024. "Do sustainability attributes play a role for individuals’ decisions regarding unit-linked life insurance? A survey research on German private investors," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(4), pages 719-746, October.
    15. Birindelli, Giuliana & Chiappini, Helen & Jalal, Raja Nabeel-Ud-Din, 2023. "SFDR, investor attention, and European financial markets," Finance Research Letters, Elsevier, vol. 56(C).
    16. Cruciani, Caterina & Santagiustina, Carlo R.M.A., 2023. "The present and future of sustainability disclosure in equity investment funds’ pre-contractual documents: Mapping ESG discourse through STM," Finance Research Letters, Elsevier, vol. 58(PA).
    17. Yin, Zhichao & Li, Xinqi & Si, Dengkui & Li, Xiaolin, 2023. "China stock market liberalization and company ESG performance: The mediating effect of investor attention," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1396-1414.
    18. Giakoumelou, Anastasia & Salvi, Antonio & Bekiros, Stelios & Onorato, Grazia, 2024. "ESG and FinTech funding in the EU," Research in International Business and Finance, Elsevier, vol. 69(C).
    19. Fabrice Hervé & Sylvain Marsat, 2023. "Eco-anxiety, connectedness to nature, and green equity investments," Economics Bulletin, AccessEcon, vol. 43(3), pages 1485-1492.
    20. Ding, Hao & Ji, Qiang & Ma, Rufei & Zhai, Pengxiang, 2022. "High-carbon screening out: A DCC-MIDAS-climate policy risk method," Finance Research Letters, Elsevier, vol. 47(PA).
    21. Scheitza, Lisa & Busch, Timo, 2024. "SFDR Article 9: Is it all about impact?," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Mutual fund; ESG; Sustainability ratings; Fund flows; Policy intervention;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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