The effect of European Sustainability Regulation on Investors’ expectations: A focus on alternative investment funds and related regulations.

Abstract

Although the concept of corporate sustainability might appear to be a relatively recent concept, it has been debated and developing extensively for at least 50 years thus far. From a purely semantical and pragmatical point of view all businesses need to be sustainable, in the sense that they need to generate enough resources to keep their business running, ideally, indefinitely. Since, a firm’s external environment is made of way more than just financial matters, it is clear that to be financially sustainable firms need also to focus on aspects of social responsibility. As a matter of facts, there was never a debate on whether firms shouldn’t also consider aspects extending beyond profits and financial performance, rather whether such focus shouldn’t be subordinated to the maximization of financial results firsts, and only then and later focus on non-financial issues. The discussion has evolved around agency theory and the shareholder versus stakeholder theory of the firm, heatedly discussing on whether management should cater exclusively for the needs of the former or more balancedly also to the needs of the latter. A debate between the views of two men, Friedman and Freeman and their respective supporters, which developed as two different and parallel paradigms which haven’t really converged yet. Notwithstanding the lack of consensus among theorists, the need and the importance of more sustainable and socially responsible firms has become undeniably prominent in modern times. This has been recognized by regulators which have recently started to centre their regulatory efforts on the sustainability of firms in the hope of taking the first steps toward a comprehensive transition of the entire economy to a more sustainable setting. An effort exemplified by the more than 680 policies and regulations focusing on sustainable finance and similar corporate social responsibility matters. Undoubtedly, the European Union has been the frontrunner for these type of policy interventions. It has been building a detailed regulatory roadmap with the objective of fostering corporate and financial sustainability. Several of such regulations are at the core of the analysis of this thesis, namely the Sustainable Finance Disclosure Regulation (SFDR) 2019/2088 and the Taxonomy regulation 2020/852 owing to their comprehensiveness and wide applicability within the financial sector. Especially in the field of alternative investments and portfolio management. Building on the premise that additional and tighter regulations eventually lead to an increase in the cost related to regulatory compliance. The objective of this thesis is to analyse whether investors react adversely to greater regulation, cognizant of the potentially positive effects that such regulations are expected to have on the quantity, quality and availability of sustainable information used by investors for their decision-making.