Increased Competition in ESG Category Has Dragged Down Fund Costs

With the rising popularity of socially responsible investments like environmental, social, and governance related funds, investors are benefiting from the increased competition as ESG fund managers try to undercut their competitors.

For example, in Europe where European asset owners have shifted to all-ESG portfolios, fund managers have been lowering fees to remain competitive. According to Morningstar Inc. data, fees have declined more for all ESG strategies compared to their non-ESG counterparts over the last seven years, Pension & Investments reports.

As of October, the asset-weighted average fee for all ESG-related funds was 0.57%, compared to 0.71% for non-ESG funds, according to the Morningstar data. Meanwhile, the equal-weighted fee for ESG funds was 0.93%, compared to 1.21% for non-ESG funds.

Among the asset-weighted category, the average fee for ESG funds has declined by 42%, while the average fee for non-ESG funds was 29.6% lower since 2013. In equal-weighted terms, the average fee on ESG funds was cut by 29% and for non-ESG by 17% over the same period.

Looking ahead, market observers argued that the new European disclosure rules such as the Sustainable Finance Disclosure Regulation could drive investors to align their portfolios with carbon reduction targets. Consequently, money managers anticipate European investors to largely purchase funds that are aligned with disclosures under Article 8 and Article 9 of the SFDR that promote ESG factors, along with those with a sustainable impact.

“What is ESG investing today will be the standard (in the future). You cannot have higher fees,” Steffen Kutscher, senior advisor investment at DWS Group, told Pension & Investments, adding that investors at the very minimum want to buy Article 8 strategies from March 10, 2021.

“Every manager is in a horse race, trying to catch up,” he said. “You can see that many managers are trying to push out strategies with lower fees to catch more flows.”

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