By Massimo Filippini and Tobias Wekhof
Massimo Filippini is a Full Professor of Economics and has held a joint professorship at ETH Zurich and the Università della Svizzera Italiana since October 1999. He is the director of the Centre for Energy Policy and Economics (CEPE) at ETH Zürich, a member of the Center for Economic Research at ETH Zurich (CER-ETH), and a member of the board of Country Representatives of the European Association of Environmental and Resource Economists (EAERE).
Tobias Wekhof is a senior researcher at ETH Zurich. He works on sustainable finance and environmental economics, combined with methods from natural language processing.
Private investors allocate more money to green mutual funds if they receive an education about sustainable finance. We designed a crash course in sustainable investing and showed its power to help individuals align their values with their money.
Financing Switzerland’s transition to a net-zero CO2 energy system by 2050 will require significant investments—up to two percent of Switzerland’s GDP annually, according to a report by SwissBanking. The study emphasizes the importance of clear sustainability disclosures to enable the financial market to close the financing gap. So far, these disclosures are often confusing, particularly for individual investors seeking to invest in sustainable finance products: regulations are unclear, product descriptions include jargon, and sustainability information is difficult to compare.
For this reason, we created a short course on sustainable finance and tested its effectiveness using a randomized control experiment with 2’021 Swiss retail investors in 2024. Our results, recently published as a working paper, show that investors who received our course shifted their investments from unsustainable to sustainable financial products. This effect was especially pronounced for participants with sustainable attitudes.
Our project aims to help private investors choose investments that align with their values. In a previous study from 2024, we found that Swiss private investors have low sustainable finance literacy. The low knowledge among investors meets conflicting rules because neither the EU nor Switzerland has strict definitions for sustainable financial products. Despite guidelines from the Swiss Federal Council, the complexity of sustainable finance often exceeds investors’ knowledge.
Sustainable mutual funds, like those often available in the third pillar of the Swiss pension system, are popular because they allow investors to support ethical labor practices or reduce CO2 emissions. Private investors can focus on sectors that match their values by investing in these funds. Additionally, sustainable investors can shift significant funds to sustainable industries, promoting a market democracy where personal choices shape a sustainable future. For example, investing in green energy firms can ease access to capital, contributing to sustainable development if investors are well-informed.
This blog post will explore how to teach sustainable finance and how private investors change their investment behavior following our education.
We can teach sustainable finance literacy
While sustainable finance literacy is low among private investors, our project showed that these skills can be taught. With the help of multiple experts, including EU and Swiss policymakers, financial professionals, and academics, we created a short course on the essence of sustainable finance. In less than 400 words, our course explains how to identify and evaluate sustainable finance products.
Addressing common misperceptions and providing clear insights are crucial to teaching sustainable finance literacy effectively. The crash course aims to inoculate private investors against inflated marketing claims in sustainable finance. As a result, private investors will learn how to identify if a fund is sustainable and evaluate its level of sustainability. The five slides containing the course can be found below.
Lack of standards
ESG risk integration
Light Green
Dark Green
Impact investing
Lack of standards
Q1: What is sustainable finance?
Sustainable finance considers environmental, social, and governance (ESG) characteristics alongside traditional financial risk and return analysis. The level of sustainability varies across financial products.
Due to the lack of standardized sustainability ratings, government guidelines aim to increase transparency. European and Swiss authorities issued guidelines for the disclosure of sustainability characteristics that apply to most investment funds sold in Switzerland.
ESG risk integration
Q2: What are funds that account only for sustainability risk alongside financial risk and return analysis?
These funds consider ESG-related issues that can negatively impact a firm’s financial performance. For example, they consider whether a company is exposed to the negative effects of climate legislation (e.g., higher CO2 taxes) or avoid investments in companies that are frequently affected by natural disasters due to climate change.
A fund that considers sustainability-related risks in addition to the financial risk analysis pursues a purely financial investment objective and is not considered a sustainable fund.
Light Green
Q3: What are funds with a medium degree of sustainability (also called “light green”)?
- In addition to financial returns, these funds also take sustainability into account as an additional criterion.
- These funds include firms that show positive environmental or social characteristics (e.g. low carbon emissions or fair wages).
- The firms do not need to meet a specific sustainability target (e.g. a specific emission goal).
Dark Green
Q4: What are funds with a high degree of sustainability (also called “dark green”)?
These funds have two goals: to meet a sustainability objective and to achieve financial gains. Regarding their, sustainability funds must meet two conditions:
(i) Declare and monitor a sustainable objective: firms in these funds must contribute to either a specific environmental or social objective (e.g., meet a specific target for CO2 emissions).
(ii) The firms in the fund do not harm any other sustainability dimension (e.g., a fund promoting fair wages must ensure that its firms do not cause any environmental harm).
Impact investing
Q5: When does a fund directly impact the sustainability performance of firms (e.g. on CO2 emissions)?
A sustainable fund (light or dark green) is not obliged to influence the firms’ sustainability strategy, e.g., CO2 emissions may remain unchanged following investment.
A fund only impacts the sustainability of firms by
- Obliging low-sustainability firms to change (e.g. introducing clean technologies like CO2-neutral production).
- Investing in new ventures (e.g. building a new wind park).
Using this material, we checked how effectively we could teach these core concepts to real investors. We conducted an online randomized control experiment with 2021 Swiss retail investors in March 2024. Some randomly selected participants received our sustainable finance course, while the other respondents acted as a control group. Respondents needed, on average, about five minutes to read the educational material. Later in the survey, we asked questions to evaluate the participants’ level of sustainable finance literacy. As expected, the group that received the crash course scored significantly higher on the literacy questions. However, we still had to show if this acquired knowledge helped investors in financial markets.
Investors with higher literacy invest more in sustainable finance products
Our survey experiment simulated a scenario where participants could hypothetically invest in four mutual funds we selected from the financial market. The funds varied in their levels of sustainability: The brown mutual fund would invest in all types of businesses in the market, and two mid-range funds excluded specific industries, such as coal power. At the high end, the dark-green fund focused on specific sustainability targets, like including firms with emissions in line with the Paris Agreement. All sustainability information was qualitative. Hence, literacy was necessary to understand the descriptions.
We selected the funds such that the more sustainable funds showed smaller past annual returns. While the academic literature about the relationship between a mutual fund’s sustainability and annual return is inconclusive, this selection allowed participants to show their tradeoff between sustainability and past returns.
To motivate participants to make realistic investment choices, we included a lottery: for four winners, we invested their mutual fund choices on their behalf, which was 1000 CHF per winner. After one year, in April 2025, we will transfer the portfolio value to each winner.
We found that participants who took the crash course were more likely to invest in the most sustainable fund. Compared to the control group, the treated investors included 6% more investors in the most sustainable fund. Without the treatment, these 6% of investors would have only chosen brown or light-green funds. As a result of the crash course, these investors reduced their shares in the least sustainable fund to invest additionally in the most sustainable one.
The effects of the course were more substantial for investors with environmentally friendly attitudes. These green investors would have invested in the most sustainable fund in any case, but they increased the invested sum if they received the education. Investors with green attitudes shifted their portfolios by reducing the amount allocated to light-green funds, frequently suffering from exaggerated marketing claims. The reverse effect did not occur: non-green investors did not opt for more brown investments following the treatment. These results suggest that green investors can use their knowledge of sustainable finance to align their values with their investments.
What comes next?
While financing the green transition requires participation from all members of society, we demonstrated that investors still need the necessary knowledge. This information can be provided in a concise and time-efficient manner. For example, brief online courses that explain key concepts such as ESG (Environmental, Social, and Governance) criteria can empower potential investors to identify funds that reflect their values. Consequently, investors can make better choices regarding their type of sustainable investment. While some individuals may prefer funds that primarily exclude specific industries (e.g., coal production), others might seek dark-green funds with more extensive sustainability criteria.
Our next step consists of making our crash course accessible to a broader audience, for example, through banks. In the European Union, the so-called MiFID II directive requires bank advisors to ask clients if they are interested in green investments. The regulation however stops there; it does not require advisors to explain how their bank defines sustainable investment products, which means that many investors might not express interest in sustainable investment because they are not aware of the term’s meaning. As most banks employ similar processes in the EU and Switzerland, this trend also reaches Swiss private investors. Hence, financial advisors could share our educational material with potential clients to help them make informed investment decisions. By empowering consumers to align investment with their values, bank-led consumer education can benefit all of society, as it is a direct mechanism for channeling private funds into renewable energy and other types of much-needed sustainable investments.
Cover image: doidam10@AdobeStock
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Suggested citation: Massimo Filippini and Tobias Wekhof. “Knowing more about sustainable finance benefits investors and society”, Energy Blog @ ETH Zurich, ETH Zurich, March 6th, 2025, https://blogs.ethz.ch/energy/sustainable-finance/
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