As environmental, social, and governance (ESG) investing continues to gain steam in the capital markets, market participants offering ESG products will have to differentiate themselves from the masses. One way is via lower fees, which is already happening in Europe, while in the United States, ETF investors can opt for low-cost funds like the SPDR S&P 500 ESG ETF (EFIV).

Per a recent Pensions & Investments article, “money managers racing to gather environmental, social and governance assets as European asset owners shift to all-ESG portfolios will have to absorb the cost of integrating specialist data if they want to remain competitive on fees, which in Europe are already lower than for non-ESG investments.”

“A European fee study by Morningstar Inc. published Dec. 7 showed that fees have fallen more for all ESG strategies compared with their non-ESG counterparts over the last seven years,” the article added further.

At a 0.10% expense ratio, EFIV seeks to provide investment results that correspond generally to the total return performance of an index that provides exposure to securities that meet certain sustainability criteria (criteria related to ESG factors) while maintaining similar overall industry group weights as the S&P 500 Index. The fund is up 14% year-to-date.

EFIV Chart

ESG Now an ‘Extensive Feature’ to the Investment Process

As ESG continues its popularity spike even amid the Covid-19 pandemic, it’s almost becoming an essential component of a balanced portfolio.

“ESG integration is now an extensive feature to any investment process,” said Sonja Laud, CIO of Legal and General Investment Management Ltd. in London.

The article also noted that “in addition to the already-existing fee pressure stemming from manager competition, regulatory requirements have additionally forced managers to absorb the costs of integrating ESG data into their investment process to offer appropriate funds for European investors.”

“Now to be competitive, managers have to be careful not to price themselves out of a market,” said Mark Fitzgerald, head of product specialism at Vanguard Asset Management Ltd. in London.

A Morningstar study revealed that on average, fees for active ESG funds in Europe are lower than those for active non-ESG funds. In addition, fees for passive ESG funds are slightly higher than those for non-ESG passive funds.

“Asset-weighted non-ESG passive funds charged a fee of 0.19% in 2020 compared with 0.25% charged by asset-weighted ESG passive funds,” the article noted. “However, non-ESG passive equal-weighted funds charged on average fees of 0.32% in 2020, whereas equal-weighted passive ESG funds also charged 0.32%.”

For more news and information, visit the ESG Channel.