Sustainable Finance Disclosure Regulation: Voluntary Signaling or Mandatory Disclosure?

Abstract

We study the consequences of mandatory sustainable finance disclosure regulation (SFDR) for the money flows and investment behavior of mutual funds. Under SFDR, any EU-regulated mutual fund is required to publicly classify itself as either Article 8 (promoting ESG characteristics), Article 9 (having ESG/sustainability goals as objective 9), or Article 6 (‘Other’ funds). Applying difference-differences analysis, we find that, EU funds classified as either Article 8 or 9 experience on average a 0.96 percentage point higher annualized flow post SFDR relative to Article 6 funds. This difference in flow is significant after both the SFDR introduction date and implementation date and holds regardless of whether funds received a high or low Morningstar Sustainability Rating pre-SFDR. Following SFDR, retail (but not institutional) funds with Article 8 or 9 classification demonstrate stronger portfolio decarbonization and higher portfolio-level ESG scores compared to Article 6 funds. In aggregate, EU-regulated funds significantly improve the ESG profile of their investments relative to U.S. mutual funds, holding for both retail and institutional funds. Taken together, the results suggest that sustainable finance disclosure regulation enables mutual funds to attract capital by signaling commitments to sustainable investments, and it induces funds to change their behavior.

Keywords: Mandatory disclosure, Signaling, Investor preferences, Mutual funds, Sustainable finance

JEL Classification: G11, G15, G23, Q58