In this paper, we conduct a stated-choice experiment with German retail investors to examine how labeling sustainability information as financially material or immaterial influences investment decisions. Results reveal a strong non-pecuniary preference for sustainability. However, emotional affect leads some investors to erroneously project sustainability information onto firms’ financial performance, regardless of financial materiality. When poor sustainability ratings are labeled as financially material, investors demand further an additional return premium, indicating a misinterpretation of these labels as financial indicators. This bias is particularly evident among investors who incorporate sustainability for pecuniary reasons in the experiment but do not use such information in real-life investing. Our findings suggest that while sustainability labels can guide investor behavior, they also risk distorting financial expectations. This underscores the need for careful design in sustainability disclosure practices and better investor education on the implications of sustainability information.