Mandatory Investor Disclosure, Sustainability Commitments, and Portfolio Decarbonization

We study the decarbonization effects of imposing sustainability regulation on investors. Our focus is the EU Sustainable Finance Disclosure Regulation (SFDR), which requires funds domiciled or marketed in the EU to classify themselves based on different degrees of sustainability commitment and imposes disclosure requirements based on such classification. Using a broad sample of international investment funds, we document that the SFDR was followed by a significant decarbonization (around 10 percent) of investment portfolios of funds domiciled or marketed in the EU claiming to invest based on sustainability criteria. Additional tests suggest that the lower level of emissions is primarily driven by changes in funds’ investment decisions, although there is some indication that firm-level emissions may also contribute to the observed decarbonization. Overall, our evidence suggests that the regulation resulted not only in shifting capital flows away from high-emission firms, but also in increased pressure on portfolio firms to achieve emissions reductions at the firm level.