Does sustainable investing cost more? This longstanding debate has left many divided and could be a key reason for many neglecting investment propositions in this space.
It is commonly assumed the extra costs ESG funds typically incur, associated with specialist ESG data, research and expertise, are passed on to the end investor.
Our recent study hopes to provide a timely answer to this debate by examining the cost evolution of a vast sample of almost 110,000 retail share classes in Europe over the past 10 years, comparing the fee prices of ESG funds against their non-ESG equivalents.
Initially, ESG funds had higher fees but, throughout the decade, these dropped substantially
From the European portion of the study, we found that, initially, ESG funds had higher fees but, throughout the decade, these dropped substantially, and funds with ESG-oriented mandates have showcased more evident cost reduction in contrast to their non-ESG peers.
As of March 2024, asset-weighted costs of ESG and conventional funds averaged 0.8% and 0.9%, respectively, compared to 1.6% and 1.3% seen in March 2013. While the cost reduction has been driven mostly by active ESG strategies, costs among passive ESG funds undergo little change and stay on par with conventional passive funds over the past five years in general.
This means that, although, originally, ESG funds did assume higher prices, they are now not only cheaper in terms of fees, but managers have also actively worked to reduce the price over time in contrast to their non-ESG counterparts. Robust results are found when we switch from net-assets-weighted average to simple average.
Managers have actively worked to reduce the price over time in contrast to their non-ESG counterparts
Though the cost advantage of ESG funds compared with conventional funds may remain somewhat counterintuitive for many, it can be explained by the fact many ESG funds have recently been launched amid stiff competition among ESG fund managers, who have a strong incentive to limit ongoing charges to attract investors.
In this regard, we compared the fees levied by the more recently incepted funds, both ESG and conventional, in the six selected categories. Our findings suggest costs of the recent ESG launches remain consistently lower than their conventional peers in both the active and passive space.
With the ESG investing landscape having changed quite drastically over the past decade, not only regarding investor sentiment but also due to regularly evolving regulation, many ESG funds have had to rebrand to keep in line with regulatory demands.
Over 60% of rebranded funds slash or maintain their costs over a 12-month period after rebranding, suggesting that adopting an ESG has not led to higher costs
To provide total clarity, we examined the fee levels of rebranded ESG funds before and after the conversion. In fact, most (over 60%) rebranded funds slash or maintain their costs over a 12-month period after rebranding, suggesting that adopting an ESG or other sustainability-related appellation has not led to higher costs for ESG funds.
Similar results are found after excluding share classes with retrocession fees which accounted for a small percentage of our entire sample.
Finally, some may argue qualification and track records of the portfolio managers, as well as branding effects of fund houses, would lead to cost merit of a number of sizable ESG funds, which could tilt the results.
In response, we examine an exhaustive list of matched ESG and conventional funds under identical portfolio managers, geographical and sectoral exposure and similar investment mandates.
These results show the majority of the matched ESG funds feature lower fees than their conventional counterparts after controlling for these important fund-level factors.
So, the myth that ESG funds are expensive has been busted.
Boya Wang is ESG analyst at Morningstar Sustainalytics
Cost isn’t really the issue. Performance is. You need to show that these funds perform at least as well as their non ESG peers over a decent time frame. How do they do against (say) Fundsmith over 5 years or Polar Capital, or Pictet?