Mandatory Disclosure of Standardized Sustainability Metrics: The Case of the EU Taxonomy Regulation

TL;DR

This paper examines how the EU's mandatory sustainability metrics influence investor decisions, finding that standardized green revenue disclosures significantly impact investment choices, especially when conflicting with sustainability ratings.

Contribution

It provides empirical evidence on the effectiveness of mandatory standardized sustainability metrics in guiding investment decisions, highlighting their role alongside sustainability ratings.

Findings

Green revenue impacts investment more than ratings when they disagree.

Strong ratings increase investment probability when they align with green revenue.

Results are robust across different investor attitudes.

Abstract

Sustainability reporting enables investors to make informed decisions and is hoped to facilitate the transition to a green economy. The European Union's taxonomy regulation enacts rules to discern sustainable activities and determine the resulting green revenue, whose disclosure is mandatory for many companies. In an experiment, we explore how this standardized metric is received by investors relative to a sustainability rating. We find that green revenue affects the investment probability more than the rating if the two metrics disagree. If they agree, a strong rating has an incremental effect on the investment probability. The effects are robust to variation in investors' attitudes. Our findings imply that a mandatory standardized sustainability metric is an effective means of channeling investment, which complements rather than substitutes sustainability ratings.