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Market-Implied Sustainability: Insights from Funds' Portfolio Holdings

Rosella Giacometti, Gabriele Torri, Marco Bonomelli, Davide Lauria

Abstract

In this work we propose a framework to construct Market-Implied Sustainability (MIS) scores for individual firms by exploiting fund-level sustainability classifications and granular portfolio holdings. The central idea is that the relative over/under-representation of a stock in sustainability-oriented funds reveals a market-based assessment of its sustainability profile. We implement the methodology in the European context using the Sustainable Finance Disclosure Regulation (SFDR), considering Article 9 (``dark green'') funds as the sustainability-oriented segment and comparing their portfolio compositions to those of other funds. We compute MIS scores for a large cross-section of European companies over the period 2010--2025. We then examine how MIS relates to traditional firm-level ESG ratings provided by LSEG and analyze the determinants of potential divergences between the two measures. Finally, we assess the economic relevance of MIS through portfolio-tilting strategies, ranging from rule-based reallocations to constrained optimal allocation frameworks. The results show that MIS scores capture dimensions of sustainability that differ systematically from conventional ESG ratings. In portfolio applications, tilting toward firms with high MIS scores improves risk-adjusted performance, whereas strategies based solely on ESG ratings do not deliver comparable gains. Overall, the findings suggest that market-implied sustainability measures provide complementary information to fundamentals-based ESG metrics and have practical relevance for asset allocation and regulatory monitoring.

Market-Implied Sustainability: Insights from Funds' Portfolio Holdings

Abstract

In this work we propose a framework to construct Market-Implied Sustainability (MIS) scores for individual firms by exploiting fund-level sustainability classifications and granular portfolio holdings. The central idea is that the relative over/under-representation of a stock in sustainability-oriented funds reveals a market-based assessment of its sustainability profile. We implement the methodology in the European context using the Sustainable Finance Disclosure Regulation (SFDR), considering Article 9 (``dark green'') funds as the sustainability-oriented segment and comparing their portfolio compositions to those of other funds. We compute MIS scores for a large cross-section of European companies over the period 2010--2025. We then examine how MIS relates to traditional firm-level ESG ratings provided by LSEG and analyze the determinants of potential divergences between the two measures. Finally, we assess the economic relevance of MIS through portfolio-tilting strategies, ranging from rule-based reallocations to constrained optimal allocation frameworks. The results show that MIS scores capture dimensions of sustainability that differ systematically from conventional ESG ratings. In portfolio applications, tilting toward firms with high MIS scores improves risk-adjusted performance, whereas strategies based solely on ESG ratings do not deliver comparable gains. Overall, the findings suggest that market-implied sustainability measures provide complementary information to fundamentals-based ESG metrics and have practical relevance for asset allocation and regulatory monitoring.
Paper Structure (22 sections, 7 equations, 10 figures, 6 tables)

This paper contains 22 sections, 7 equations, 10 figures, 6 tables.

Table of Contents

  1. Introduction
  2. Contributions and goals
  3. Measuring sustainability -- ESG scores
  4. The SFDR framework
  5. MIS -- Market-Implied Sustainability scores
  6. Construction of MIS Scores Using SFDR Fund Classifications
  7. Dataset description
  8. MIS and ESG scores
  9. Explaining MIS scores -- a quantile regression analysis
  10. Quantile regression results
  11. The determinants of MIS scores
  12. Does MIS explain ESG score?
  13. Discussion
  14. Portfolio tilting
  15. Portfolio tilting strategies
  16. ...and 7 more sections

Figures (10)

  • Figure 1: Coverage for LSEG ESG scores (top panels) and daily equity time series (bottom panels) for each quarter. The left panels summarize coverage by number of assets, while the right panels report aggregate market value.
  • Figure 2: SFDR distribution by quarter. Panel A reports the number of funds by SFDR category (as assigned in 2023) for each quarter. Panel B reports aggregate market value.
  • Figure 3: Word cloud of funds' names for SFDR Article 6 (left), 8 (middle), and 9 (right) funds.
  • Figure 4: Average fund-level ESG scores by SFDR classification. The left panel shows the time series of average ESG scores for each SFDR class. The right panel displays box plots of the cross-sectional distribution of ESG scores by class as of 31 December 2024.
  • Figure 5: MIS score vs ESG score for three representative time periods. Red dots represent stocks with MIS score statistically significantly different from 0 with 90% confidence.
  • ...and 5 more figures