Anouk Levels

This dissertation examines green capital markets in the European Union (EU) and asks whether better disclosures on environmental, social and governance (ESG) aspects can help investors redirect capital towards ‘green’ projects and improve funding conditions for firms, including across borders.

The dissertation is motivated by the sustainable finance framework that the EU has developed since 2018. This framework was introduced as part of the EU’s objective of becoming climate neutral by 2050, which requires substantial adjustments to the European economy. Because public budgets are limited, the transition to a more sustainable economy largely depends on private investors directing more capital towards green projects. To support this, the EU has introduced rules intended to improve the quality and reliability of firms’ ESG disclosures. The idea is that better information helps investors make better-informed decisions and supports the flow of capital towards green investments across borders within the EU. Firms, in turn, may benefit from better access to funding and more favourable funding conditions. However, whether these ESG disclosure rules can influence capital market outcomes in line with the EU’s policy objectives remains an open question.

Against this background, this dissertation seeks to contribute to answering the overarching question of whether ESG disclosures, whether voluntary or mandatory, can reduce investors’ information problems in ways that materially affect the allocation and cost of capital for green investments, including across borders, in the EU. To address this overarching question, the dissertation assembles three self-contained studies that are organised in two parts.

Part I (Chapters 2 and 3) uses the emerging euro area green bond markets as an empirical case study, using unique and confidential Eurosystem data on bond holdings by euro area investors. It examines whether better information really encourages investors to reallocate capital into green projects across borders. Between 2014 and 2022, these markets were still new, so investors often had to look abroad when green bonds were not yet available at home. Because there were no harmonised rules on, for example, what counted as ‘green’ or how proceeds should be used, investors likely faced difficulties in obtaining and assessing the information needed to make investment decisions. The dissertation uses this setting to ask whether investors who acquired knowledge about foreign markets continued to use that knowledge once domestic green bond markets emerged. Part I also asks whether firms that choose to provide voluntary climate-related financial disclosures are better able to attract foreign investors in a market where reliable information is still limited.

The dissertation shows that having more information or prior knowledge does not automatically mean that investors act on it. Investors who acquired knowledge about foreign firms by investing abroad, because no domestic market was available, do not appear to make full use of that knowledge once a home market emerges. Instead, they seem to overinvest in domestic green bonds, to a degree that economic theory would suggest is suboptimal for both investors and firms seeking funding. The dissertation also does not find evidence that firms adopting voluntary ESG disclosures were able to attract structurally more foreign investors to their green bonds.

Part II (Chapter 4) broadens the focus beyond the single market segment of green bonds and examines the broader evidence across EU financial markets. It adopts a systematic literature review and brings together and critically evaluates existing studies on whether voluntary and mandatory ESG disclosures help direct private capital towards green investments and improve funding conditions for these green investments. To do so, Part II compares empirical evidence across different market participants, different types of ESG disclosures and the capital market outcomes of interest. It identifies what is currently known, highlights gaps and limitations in the existing empirical literature and discusses implications for future research and the ongoing policy debate on sustainable finance regulation in the EU.

The review shows that, although the current evidence base is still limited, there are initial signs that high-quality ESG disclosures, whether voluntary or mandatory, are linked to better access to capital and more favourable funding conditions. However, this link may not be the same in all settings, as it depends on differences across countries, including differences in culture and institutions, and firm-specific characteristics. In addition, although only a small number of studies directly examine EU sustainable finance legislation, early evidence suggests that mandatory disclosures may help direct capital towards green investments and improve funding conditions in line with policy objectives. At the same time, the literature points to unintended effects, including complexity, regulatory uncertainty and compliance costs.

Collectively, these results have clear implications for policymakers and regulators. They suggest that the EU sustainable finance framework may help direct capital towards green investment projects, but that its effectiveness depends on ongoing refinement to balance investors’ information needs with the need to limit unintended consequences. They also show that better disclosure alone is unlikely to be enough to increase cross-border investment. If deeper capital market integration remains a policy objective, disclosure rules will need to be complemented by other measures, while recognising the limits of what legislation can achieve given investors’ persistent preference for domestic markets.