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PB 6/2024: Why Do Investors Pay Higher Fees for Sustainable Investments? The role of financial literacy

  • The growing supply of sustainable investments, along with increased media attention and EU regulations (like the MiFID II amendments of 20211 and the introduction of the SFDR2), are bringing more retail investors into contact with sustainable investment products, regardless of their motives.
  • Consequently, retail investors face an additional layer of complexity in their investment process, making decisions more challenging and potentially leading to various issues.
  • Building on the knowledge that retail investors often overlook the importance of fees, Engler, Gutsche, and Smeets (2024) examine the role of financial literacy on fee sensitivity for sustainable investments among individual investors in five EU countries (France, Germany, the Netherlands, Poland, and Spain).
  • The study reveals that financially literate investors are more fee-sensitive, while less financially literate investors tend to pay higher fees. Financially illiterate investors tend to i) overlook fees and ii) mistakenly believe that more expensive funds will outperform after fees.
  • The authors show that this problem also exists with conventional investments, but is exacerbated by the added layer of sustainability.
  • Investors in Germany and the Netherlands, where average financial literacy is highest, show the greatest sensitivity to fees.
  • Therefore, financial regulation must recognize and enhance the role of financial literacy in protecting investors, while taking into account potential country differences.
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