Financial Market Response to SFDR: ESG Scores and Stock Performance in the EU Banking Sector

Abstract

This study investigates the financial market's response to the European Union's Sustainable Finance Disclosure Regulation (SFDR) and aims to examine EU banks' stock returns based on their ESG performance. Previous research indicates that increased regulation has led to mixed results depending on sector and framework, and that a high ESG is not always positively associated with higher returns. This study contributes by analysing a new regulatory framework within the specific context of the EU banking sector. Using panel data from 58 EU banks between 2010 and 2024, OLS regressions are applied to assess SFDR's effect on abnormal returns. The regression results varied regarding the effect of a high ESG during the study period. The thesis ultimately revealed a significant but modest negative relationship of -0.01 percentage points between high ESG scores and abnormal returns in the post-SFDR period. This finding aligns with stakeholder and principal-agent theories, suggesting that as sustainability disclosure becomes mandatory, the market may reassess the value of high ESG scores, perceiving less sustainable advantage for these banks. However, it remains important to note that macroeconomic events, which were not controlled for, could have influenced these results.