ESG funds are, on average, cheaper than non-ESG funds and have higher returns, a research paper has found.
As part of their study, The Puzzle of ESG Fund Fees, which was published by the Swiss Finance Institute, Aaron J. Black, University of St. Gallen and Julian F Kölbel, University of St. Gallen – School of Finance/MIT Sloan, analysed 44,220 equity fund share classes in the US, between 2011 and mid-2024. Of these, 1,600 were ESG fund share classes.
The study focused on the fees charged and various other factors such as the age and size of the funds.
‘Conventional wisdom’
As Joachim Klement, research analyst with Panmure Liberum, commented, “Conventional wisdom has it that ESG funds are more expensive than non-ESG funds, because they can charge higher management fees due to the extra layer of analysis involved in their management. And if you look at gross expense ratios, ESG funds are in fact on average more expensive than non-ESG funds. The average gross expense ratio of ESG funds in their analysis was 1.48% of assets under management per year. The average gross expense ratio of non-ESG funds was 1.34%.
“But if you look beyond this ‘sticker price’ at what investors paid, the picture flips.”
As the Swiss Finance Institute report notes, ESG funds in the U.S. charge net expense ratios that are 9.5 to 12.7 basis points lower than those of non-ESG funds.
‘This contrasts with the existing literature on investors‘ willingness to pay for ESG,’ the authors state. ‘The fee difference is driven by the use of waivers, which offset the higher gross expense ratios of ESG funds.’
Higher returns
As Panmure Liberum’s Klement points out, the net expense ratio for ESG funds was 0.85%, compared to 1.01% for non-ESG funds. Moreover, the fee waivers granted to ESG funds were nearly twice as large (0.63%) as those given to non-ESG funds (0.33%).
“Meanwhile, the average monthly performance after fees of ESG funds (0.64%) was higher than for non-ESG funds (0.54%),” he commented. “You get higher returns for lower costs with ESG funds.”
The authors of the report cite three explanations for their findings, firstly, that heightened competition among ESG funds exerts downward pressure on fees, secondly, that ESG funds exhibit lower expected returns, and thirdly, that fund families strategically use ESG funds with low fees to cross-sell higher-fee funds. Read more here and here.
