Are hedge funds still greenwashing? A study of the impact of the European regulation against greenwashing

Abstract

This thesis examines the impact of the European Union’s Sustainable Finance Disclosure Regulation (SFDR), implemented in March 2021, on the mutual fund industry. The study analyzes the evolution of Morningstar ESG ratings, fund flows, and financial performance be- fore and after the regulation’s enforcement. By using panel data, transition matrices for the ratings and Ordinary Least Squares (OLS) regression analysis, the research evaluates whether the SFDR has led to measurable improvements in fund sustainability profiles and shifts in in- vestor behavior. Findings from this analysis show that while funds’ ESG ratings improved, there was also a concurrent negative impact on fund flows and performance. The study con- tributes to the literature on ESG regulation by providing empirical evidence of the SFDR’s dual effect: successfully enhancing disclosure while also being associated with market friction and a performance penalty.