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Sustainable funds have probably come to the market more recently and do not therefore have the higher ‘legacy’ fees, analysts say © AFP via Getty Images

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New research has debunked the idea that funds integrating environmental, social and governance factors charge higher average fees than their non-ESG peers.

Several analyses reveal that there is no fee premium built into active or passive ESG funds, indicating previous criticism that such funds charge higher fees than their non-ESG counterparts is now inaccurate.

Morningstar data shows that ETFs categorised as sustainable in five out of six large fund categories charge lower average annual fees than non-ESG funds in Europe.

For example, global large-cap ETFs charge an average of 0.3 per cent, while global funds integrating ESG charge 0.28 per cent.

ESG ETFs charges compared to non-ESG peers (%)
ETF categoryESGnon ESG
Europe Large-Cap Blend0.220.24
Eurozone Large-Cap0.210.22
Global Emerging Markets0.270.39
Global Large-Cap Blend0.280.30
UK Large-Cap0.190.17
US Large-Cap Blend0.190.22
Source: Ignites Europe analysis of Morningstar data. Average ongoing charges of European ETFs

Investors do not have to pay more for actively managed sustainable funds either, researchers have found.

Fitz Partners, a specialist fee research company, found that socially responsible funds had lower annual charges than traditional global equity funds based in the UK.

The research, which compared commission-paying share classes, rebate-free classes and institutional share classes, suggested there was “no fee premium” for socially responsible funds, said Hugues Gillibert, chief executive of Fitz.

This article was previously published by Ignites Europe, a title owned by the FT Group.

By contrast, non-SRI funds are often older and more likely to reflect “legacy pricing”, Gillibert said, pointing out that many socially responsible funds had been launched more recently.

Laith Khalaf, head of investment analysis at AJ Bell, a fund platform, agreed, saying that lower charges for ESG funds investing in UK larger companies in particular could be the result of “a higher number of legacy [non-ESG] funds with less-competitive charges from a bygone era”.

“Ethical funds, which have been launched in the sector more recently, have probably come to market with keener prices to pull new investors in,” Khalaf said.

Morningstar research comparing fees for active and passive ESG and non-ESG funds across Europe found a similar trend.

Active and passive ESG funds and non-ESG peers charges (%)
Fund categoryAsset weightedEqual weighted
Non-ESG Active1.141.39
ESG Active0.971.11
Non-ESG Passive0.180.32
ESG Passive0.240.32
Source: Morningstar, European Fee Study

Actively managed ESG funds have an average annual charge of 1.11 per cent, compared with 1.39 per cent for non-ESG funds, the data show.

However, ESG funds do not have a cost advantage in all situations, according to the Morningstar data.

European passive ESG funds lose their cost advantage when using asset-weighted averages. On this basis, passive ESG funds charge 0.24 per cent, compared with 0.18 per cent for non-ESG funds.

This reversal of the wider ESG cost advantage was a result of many passive non-ESG funds charging “rock-bottom fees” in “popular and competitive” categories such as US large-cap equities, said Hortense Bioy, global director of sustainability research at Morningstar.

In this way, the benefits of scale in the largest passive funds are reflected in lower asset-weighted average charges.

There can also be additional costs that passive ESG funds incur compared with non-ESG products.

Howie Li, head of ETFs at Legal & General Investment Management, said it often cost more to license indices for more specialised investment strategies, including ESG.

A lot of the costs involved in research and data were “not cheap”, particularly for strategies that require multiple experts and data sources, Li said.

This was similar to an active manager having to pay for various research and data, he added.

Bioy agreed, saying: “ESG ETFs that track new or custom benchmarks based on third-party ESG research tend to charge a premium.”

By contrast, ESG-screened ETFs that simply exclude controversial activities such as weapons, tobacco or thermal coal “tend to have fees on par with non-ESG ETFs”, she added.

ETF providers also incur higher investment stewardship costs.

“Voting and engagement teams have grown in recent years and the cost associated with their activities is expected to rise, especially in the context of the climate crisis,” Bioy said.

However, she expected downward fee pressure to grow on ESG ETFs. “Historically, ETF providers have been able to justify higher fees for new and innovative products, but that won’t probably be the case for ESG strategies as ESG becomes mainstream and competition heats up.”

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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