Market-Implied Sustainability: Insights from Funds’ Portfolio Holdings

ArXiv ID: 2510.20434 “View on arXiv”

Authors: Rosella Giacometti, Gabriele Torri, Marco Bonomelli, Davide Lauria

Abstract

In this work, we aim to develop a market-implied sustainability score for companies, based on the extent to which a stock is over- or under-represented in sustainable funds compared to traditional ones. To identify sustainable funds, we rely on the Sustainable Finance Disclosure Regulation (SFDR), a European framework designed to clearly categorize investment funds into different classes according to their commitment to sustainability. In our analysis, we classify as sustainable those funds categorized as Article 9 - also known as “dark green” - and compare them to funds categorized as Article 8 or Article 6. We compute an SFDR Market-Implied Sustainability (SMIS) score for a large set of European companies. We then conduct an econometric analysis to identify the factors influencing SMIS and compare them with state-of-the-art ESG (Environmental, Social, and Governance) scores provided by Refinitiv. Finally, we assess the realized risk-adjusted performance of stocks using portfolio-tilting strategies. Our results show that SMIS scores deviate substantially from traditional ESG scores and that, over the period 2010-2023, companies with high SMIS have been associated with significant financial outperformance.

Keywords: market-implied sustainability, SFDR, ESG scores, portfolio tilting, risk-adjusted returns, Equity

Complexity vs Empirical Score

  • Math Complexity: 4.5/10
  • Empirical Rigor: 7.0/10
  • Quadrant: Street Traders
  • Why: The methodology uses straightforward econometric analysis (quantile regression) rather than complex mathematics, but heavily relies on a large, real-world European dataset (2010-2023) with concrete portfolio-tilting strategies and performance metrics.
  flowchart TD
    A["Research Goal: Develop Market-Implied Sustainability Score"] --> B["Data Input: European Funds & Holdings<br>SFDR Classification: Article 9 vs 8/6"]
    B --> C["Methodology: Compute Over/Under-Representation<br>vs Traditional Funds"]
    C --> D["Computational Output:<br>SMIS Score per Company"]
    D --> E{"Econometric Analysis<br>vs Refinitiv ESG Scores"}
    E --> F["Key Findings:<br>1. SMIS deviates from traditional ESG<br>2. High SMIS drives financial outperformance (2010-2023)<br>3. Successful Portfolio Tilting Strategy"]