Revenue Alignment with the EU Taxonomy Regulation

This article examines how the passage of the EU Taxonomy Regulation (TR) has affected the realized returns of TR-aligned companies. The TR introduces a new classification scheme for environmentally sustainable economic activities as an alternative to traditional environmental, social, and governance (ESG) ratings. Our results show that, first, firms with closer TR revenue alignment had higher monthly stock returns since the European Commission established the High-Level Expert Group on sustainable finance, whose work ultimately led to the TR. Second, stock market reactions around the publication of the regulation are positive (negative) for firms with high (low) TR revenue alignment. Third, the (TR alignment) premium for environmentally sustainable companies increases with greater investor attention to the new regulation. Finally, we show that returns are higher when the sustainability assessment as per the TR exceeds the firms’ traditional ESG rating. This last finding is indicative of a possible reallocation of capital by investors with sustainability preferences, who are already applying the TR as they identify or reassess sustainable companies