Does ESG-score matter to investors? - An EU Taxonomy Perspective

Abstract

Since the introduction of the EU Taxonomy, it is still unclear how it affects investors' perception and actions towards high ESG-scoring firms, and whether it effectively promotes sustainable investing. The implications of the EU Taxonomy on finance and the environment are significant and must be addressed. Hence, by conducting an event study, this thesis analyzes the market reaction to the introduction of the EU Taxonomy to determine its impact on investors' perception and actions towards high ESG-scoring firms. We investigate whether the taxonomy is effectively promoting a transition to a sustainable economy and evaluate whether the market rewards or penalizes firms based on their ESG performance as well as if the aim of the EU Taxonomy is reachable. Our results show that the introduction of the EU Taxonomy has changed investors' perception and actions towards high ESG-scoring firms, leading to decreased actions and a deteriorated perception, as we find that high ESG-scoring firms earned negative 66-basis point CAAR under our primary event window for the introduction of the EU Taxonomy. Based on this, our results indicate that the EU Taxonomy is not effectively promoting the transition towards a sustainable economy in the short-term and hence the market seems to penalize firms based on their ESG performance. This study contributes to the literature by providing contradictory evidence to the findings of prior research, and to a better understanding of the role of the EU Taxonomy in promoting sustainable investing and highlights implications for policymakers and the financial industry.