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Is the SFDR effective in directing capital towards sustainable targets and improving transparency?
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School of Business |
Master's thesis
Electronic archive copy is available via Aalto Thesis Database.
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en
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78
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Abstract
This thesis investigates the effectiveness of European Union’s Sustainable Finance Disclosure Regulation. The SFDR was introduced by the European Commission to mitigate greenwashing in the previously scarcely regulated field of sustainable investing. The regulation mandates financial institutions to disclose sustainability data in a unified format, and categorizes products into three classes based on their sustainability ambition. The impact of SFDR is studied through assessing its’ success in achieving the two main regulatory objectives: directing capital towards sustainable targets and improving transparency and comparability.
The ability to direct capital is studied in two ways. First, the impact of SFDR on mutual funds’ behavior is assessed by analyzing the development of portfolio carbon emissions. Secondly, the effect of SFDR on investors is investigated by analyzing the effect of SFDR labels on fund netflows. The effect of SFDR on transparency and comparability is analyzed by studying the proportion of funds labeled as sustainable by SFDR, that exhibit indicators of sustainability discrepancies. The study utilizes a data sample of 122,841 fund-month observations of European and US mutual funds from September 2019 to June 2023.
The results suggest that SFDR succeeds in directing capital towards sustainable investment targets. However, the analysis indicates that the SFDR labels should not be interpreted as measure for sustainability, as the ambiguity of sustainability definitions allows also unsustainable products to be classified as sustainable. The study provides new insights onto existing literature by using carbon emissions as the sustainability measure, including the time after SFDR level 2 implementation into the analysis and using a numerical approach to evaluate the accuracy of SFDR labels.