This article was written by Nakul Nair, Data Science Specialist at Bloomberg.
The Sustainable Finance Disclosure Regulation (SFDR) mandates that investment funds in the European Union disclose the extent of their focus on sustainability initiatives. SFDR, which was entered into force in March 2021, has had a significant impact on funds capital allocation decisions. While SFDR is a regulatory obligation, in this blog, we show that data from SFDR reporting can also be used to inform investment decisions, by backtesting different strategies.
We took the universe of funds disclosing under SFDR Article 9, 8 and 6 and extracted the US equity holdings in these funds. We then devised a backtest to compare the returns from investing in these equity holdings when their gross margins were in the top 15% of our universe with returns from shorting the holdings with margins in the bottom 15%, applying quarterly rebalancings between 2018 and 2023.
As shown in figure 1, the backtest shows that holdings of Article 9 funds out-performed relative to the S&P 500, which we use as the benchmark as the test focuses on US equity holdings.