The Effects of Regulating Greenwashing: Evidence from Europe’s Sustainable Finance Disclosure Regulation (SFDR)

We examine the impact of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) on mutual fund flows and investment sustainability. The SFDR classifies funds into three categories to promote transparency and curb greenwashing: those with a sustainable investment objective (Article 9 or “dark green”), those that promote environmental characteristics (Article 8 or “light green”), and others (Article 6). Using a difference-in-differences design, we find that the SFDR had little effect on fund flows or portfolio sustainability. The disclosures were ineffective in part because they offered little new or clear information beyond what investors could already infer from fund names and mandates. In an experimental setting, we show that the current disclosures have minimal impact on investor decisions, but making the information more intuitive could improve the regulation’s effectiveness.