According to data published by Morningstar Sustainalytics, ESG funds in Europe are generally not more expensive than non-ESG funds. This trend is attributed to increased product availability and heightened competition within the ESG sector. A new report titled “Myth busting: ESG funds aren’t more expensive than non-ESG funds” addresses the common misconception that ESG data, research, and expertise costs are passed on to investors.
The report compares the costs of ESG funds in Europe to conventional funds across six popular Morningstar categories over the past decade. The analysis, which includes over 110,000 retail share classes from more than 37,400 funds domiciled in Europe, including approximately 4,000 ESG funds, reveals that ESG funds are not necessarily costlier. These six categories represent over 70% of the European ESG fund universe.
The report reveals that ESG funds are generally not more expensive than their conventional counterparts. Their costs have declined in recent years partly because of the proliferation of new strategies and intensifying competition in the ESG space.
Also, the asset-weighted representative costs for ESG funds in six of the most popular Morningstar categories average 0.83%, compared with 0.90% for conventional funds. These were 1.55% and 1.32%, respectively, one decade ago.
Notably, active ESG funds have lower costs than conventional funds in five of the six selected categories, based on both asset-weighted and simple averages. For passive ESG funds, costs are comparable to non-ESG funds in four of the six categories on an asset-weighted average basis. Emerging markets are the only category where passive ESG funds have slightly higher expenses, with an average gap of 0.05%.
The report also notes that new active ESG funds launched in recent years typically charge lower fees than new non-ESG funds, though this trend does not always apply to new passive ESG funds. Also, most rebranded ESG funds have either maintained or reduced their costs after rebranding. In 2021, a year of record rebranding activity, nearly 60% of rebranded ESG funds either reduced their costs or kept them unchanged.
Hortense Bioy, head of Sustainable Investing Research, Morningstar Sustainalytics, said, “Investors have been led to believe that ESG-focused funds are more expensive than conventional funds. While there is undoubtedly a wide range of ESG strategies with various price tags out there, we found that, on average, ESG funds don’t charge more than non-ESG funds. This is mainly due to the proliferation of new products and growing competition in the ESG space in recent years.”
