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Sustainable finance regulation, funds' portfolio reallocation and real effects

Author

Listed:
  • Francesco Columba

    (Bank of Italy)

  • Andrea Fabiani

    (Bank of Italy)

  • Raffaele Gallo

    (Bank of Italy)

  • Giorgio Meucci

    (Bank of Italy)

Abstract

We show that sustainable investment by mutual funds influences non-financial firms' stock prices and real outcomes. Our identification exploits the EU Sustainable Finance Disclosure Regulation (SFDR) – requiring mutual funds to disclose no, mild, or strong commitment to sustainable investment – and rich microdata. Funds disclosing a mild commitment reduce exposure to high ESG risk ('brown') stocks, relative to those with no commitment. By contrast, strongly committed funds do not adjust, being already perceived as sustainable and having little incentive to further signal their ESG strategy. The divestment of brown firms occurs independently of their prior sustainability pledges and reduces their stock prices. This reduction is in turn associated with lower environmental spending and higher carbon emissions. Our findings suggest that blanket divestment by ESG funds may unintentionally worsen environmental performance by weakening firms' incentives to invest in sustainability.

Suggested Citation

  • Francesco Columba & Andrea Fabiani & Raffaele Gallo & Giorgio Meucci, 2025. "Sustainable finance regulation, funds' portfolio reallocation and real effects," Questioni di Economia e Finanza (Occasional Papers) 948, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_948_25
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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