The impact of EU SFDR level 2 on sustainable investment practices and investor behavior

Abstract

This thesis investigates the impact of the European Union's Sustainable Finance Disclosure Regulation (SFDR) Level 2 on sustainable investment practices and investor behavior. Implemented in 2023, SFDR Level 2 introduced Regulatory Technical Standards (RTS) requiring detailed disclosures about ESG factors, sustainability risks, and impacts by asset managers. Employing a difference-in-differences methodology this study first investigates whether the new regulation has motivated funds to improve their sustainability practices and how these changes impact investor demand. Furthermore, the analysis examines funds that have reclassified their SFDR status to a greener category, assessing the underlying factors and the resulting consequences.

The findings reveal that European funds significantly improved their sustainability ratings post-implementation, indicating a positive regulatory impact on fund behavior. However, despite higher sustainability ratings and ESG labels positively influencing fund flows, greener SFDR classifications did not result in increased inflows. This research provides new insights into the effectiveness of SFDR in promoting sustainable investment practices and its complex relationship with investor behavior, offering valuable implications for asset managers, investors and policymakers.