Sustainable finance regulation, funds' portfolio reallocation and real effects

Francesco Columba, Andrea Fabiani (), Raffaele Gallo () and Giorgio Meucci ()
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Andrea Fabiani: Bank of Italy
Raffaele Gallo: Bank of Italy
Giorgio Meucci: Bank of Italy

No 948, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: mutual funds; ESG; sustainability; portfolio holdings; real effects (search for similar items in EconPapers)
JEL-codes: G11 G23 G28 G32 Q5 (search for similar items in EconPapers)
Date: 2025-07
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_948_25

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