There's a Reason Why Money Managers Put ESG on a Pedestal

The growing popularity of socially responsible investment funds has been a positive for the issuers that offer these types of products.

Exchange traded funds that track the socially responsible investment theme come come with 43% higher fees than widely popular beta index funds, the Wall Street Journal reports.

According to FactSet data, the average fee on environmental, social, and governance funds was 0.2% as of the end of 2020. In comparison, ETFs that invest in U.S. large-cap stocks come with a 0.14% average fee, and some ETFs on the market even have zero fees or a 0.00% annual expense ratio.

“ESG creates a fantastic revenue possibility for large firms,” Dr. Wayne Winegarden, a senior fellow at the Pacific Research Institute, told the WSJ.

Asset managers are among the biggest supporters behind the drive for sustainable investing as they aim to capture some of the robust inflows into investments that focus on topics like clean energy or diversity. After a broad fee war has dragged ETF price tags closer and closer to zero for money managers over the last decade, fund providers are looking to capture more revenue from this sudden surge of interest in this corner of the market.

“It’s fresh, feels good and new,” Andrew Jamieson, global head of ETF product at Citigroup Inc., told the WSJ of ESG investing. “But it’s not any different than anything else. These things aren’t any more expensive to run.”

According to FactSet, almost $8 billion has already gone into a number of U.S. ESG-related funds in just January and February alone, putting the first two months of 2021 flows roughly on par with total flows for all of 2019.

The pace of new money going into ESG investing does not seem to be abating anytime soon. According to a Brown Brothers Harriman survey of 382 money managers, nearly three quarters of respondents said they planned to increase allocations to ETFs, with an emphasis on sustainable funds.

Meanwhile, to capture this increased interest, money managers launched a record 71 sustainable investment-rated mutual funds and ETFs in 2020, according to Morningstar.

For more news, information, and strategy, visit the ESG Channel.