A new study by 黑料不打烊鈥檚 Assistant Professor Drew Peabody and Associate Professor Kate Upton suggests that European funds moving from a strict 鈥渄ark green鈥 category to a lighter sustainability rating may see more investors withdraw their money.
In Europe, a rule called the Sustainable Finance Disclosures Regulation (SFDR) asks investment funds that claim to be sustainable to show how environmentally friendly they are. Funds classified with a 鈥渄ark green鈥 rating are seen as very committed to sustainability, while those with a 鈥渓ight green鈥 rating are not held to as strict standards.
Assistant Professor Drew Peabody and Associate Professor Kate Upton studied what happened when funds changed from 鈥渄ark green鈥 to 鈥渓ight green鈥 as a result of reclassification by fund managers in response to updated SFDR guidance in late 2022. Their findings suggest that, after a downgrade, more investors may decide to remove their money. In addition, some funds might start investing in options that are less focused on being eco-friendly.
鈥淭his research sheds light on how investors react to changes in investment sustainability ratings 鈥 giving us insight into how important environmental issues actually are to them,鈥 Peabody said.
Key Findings:
- Funds that lose the 鈥渄ark green鈥 rating might see more investors withdrawing their money.
- Some funds may adjust their investments to include fewer environmentally friendly options.
- Funds already lower on the green scale may try to avoid further downgrades by maintaining their status.
鈥淥ne of the most rewarding aspects of this research has been the opportunity to bring these findings directly into the classroom. It鈥檚 a chance to show students how the theories we discuss play out in real markets and real decisions 鈥 bridging the gap between academic work and practical finance,鈥 Upton said.
The study, 鈥,鈥 was published in The Journal of Investing and was co-authored with Hiro Nishi from the University of Texas at Dallas and Eli Sherrill from Illinois State University.
Before joining the Martha and Spencer Love School of Business in 2021, Peabody was a faculty member at the University of Texas Dallas. He currently teaches Advanced Managerial Finance, Venture Capital Financing, and Finance Foundations, and his research focuses on areas including corporate financing, valuation, financial technology, and venture capitalism.
Upton joined the Love School of Business in 2014. She teaches Principles of Finance, Financial Markets and Institutions, Sustainable Finance and Financial Modeling with Excel. Upton is currently the director of the Reed Finance Center and the recipient of the Trapani Family Faculty Excellence Award during the 2024-2025 school year. Her research explores sustainable investing and financial market dynamics.