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.
As of October, the asset-weighted average fee for all ESG funds — defined by having ESG language in the fund description — was 0.57% vs. 0.71% for non-ESG funds, according to Morningstar figures — a mix of institutional and retail data. The equal-weighted fee for ESG funds was 0.93% vs. 1.21% for non-ESG funds.
In the asset-weighted category, the average fee for ESG funds has fallen by 42% and by 29.6% for non-ESG funds since 2013. In equal-weighted terms, the average fee for ESG funds dropped by 29% and for non-ESG by 17% over the same period.
Sources said that new European disclosure rules such as the Sustainable Finance Disclosure Regulation, effective in March 2021, will push investors to further align their portfolios with carbon reduction targets. In the new year, money managers expect European investors to focus on largely buying funds that are compliant with disclosures under Article 8 and Article 9 of the SFDR that promote environmental and social factors as well as those aimed at having a sustainable impact, respectively, rather than traditional non-ESG funds.
But to attract business to their strategies, money managers will have to make some sacrifices when it comes to fees.
"What is ESG investing today will be the standard (in the future). You cannot have higher fees," said Steffen Kutscher, senior advisor investment and ESG advisory Europe, Middle East and Africa and Asia-Pacific in the product division at DWS Group in Frankfurt. He said 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 added. "You can see that many managers are trying to push out strategies with lower fees to catch more flows," he said.