Does SFDR Classification Explain Fund Performance? : Evidence from European Equity Funds

This thesis investigates the financial performance of European equity funds classified under the Sustainable Finance Disclosure Regulation (SFDR). The study compares traditional funds (Article 6) with sustainable funds (Articles 8 and 9) over a three-year period following the implementation of SFDR. The objective is to examine whether sustainability classification can explain the variation in excess returns (alpha), using a standardized, regulation-based framework rather than ESG ratings. Prior studies on sustainable fund performance were conducted before the full implementation of SFDR, leading to inconsistent ESG ratings, unclear fund classifications, and concerns about greenwashing and data transparency. As a result, the existing literature provides mixed evidence. To address these gaps, this study employs a cross-sectional analysis design to compare multiple groups of equity funds over three years, capturing the performance differences at a single point in time. Key performance metrics include Sharpe ratio, average annual return, compound annual growth rate (CAGR), alpha, beta, and standard deviation. One-way ANOVA and Tukey’s post-hoc tests were applied to identify group differences, while a multiple linear regression was used to isolate the impact of SFDR classification on excess return (alpha), controlling for fund-level characteristics such as size, fees, beta, regional exposure, and market capitalization focus. The results show that while Article 9 funds underperformed in raw return metrics compared to Articles 6 and 8, there was no statistically significant difference between Article 6 and 8 funds in descriptive terms. However, the regression analysis reveals that sustainable funds (both Article 8 and 9) are significantly associated with lower alpha compared to traditional funds (Article 6). These findings suggest that SFDR sustainability labels, on their own, do not serve as reliable indicators of value-adding investment strategies. SFDR classification does explain variation in alpha, but its explanatory power is limited, and other fund-level factors likely play a more substantial role. This study’s primary practical contribution is to provide investors, fund managers, and policymakers with clearer insights into the financial implications of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) classifications.