Environmental, social, and governance (ESG) investing is all the rage, but understanding why large asset managers have embraced the strategy is now more readily apparent.
While, in part, an effort to develop ESG options in keeping with societal and environmental good, and partly an accurate reflection of consumer demand, the higher fees they bring shouldn’t be dismissed.
According to The Wall Street Journal, investing in one’s values and “doing well by doing good” comes with a cost.
Citing ETF data from FactSet, it found the ESG funds’ “average fee was 0.2% at the end of last year, while standard ETFs that invest in U.S. large-cap stocks had a 0.14% fee on average …A firm managing $1 billion in a typical ESG fund, for example, would garner $2 million in annual fees versus managing the standard ETF’s $1.4 million.”
The paper points to ongoing fee compression with which asset managers must deal, leading to razor-thin margins that continue to fall. It’s affecting every area of the investing industry, so anything that offers a chance to charge more is (unfortunately) getting attention—and assets.
The kicker, of course, is that ESG strategies aren’t any more expensive to run than their more-traditional counterparts. No matter; their differentiation and newness allow for the premium, and flows are moving in their direction.
“Nearly $8 billion has flowed into a host of U.S. ESG-themed funds in just January and February, according to FactSet, putting the first two months of flows roughly on par with all of 2019.”
Whether regulators and politicians will notice or even care is yet to be seen. Still, for now, money managers are flooding the zone, launching “a record 71 sustainable mutual funds and ETFs last year,” the Journal reports, citing Morningstar.
The Business Roundtable embraced ESG principles in the summer of 2019, shedding its long-held view that corporations exist principally to serve shareholders. It was seen as a shrewd political move—rent-seeking of sorts to keep the Congressional hounds at bay in the wake of protests over corporate carbon footprints.
The latest data proves it was a shrewd money move as well, at least for the managers themselves. Whether they can “sustain” the higher fees will be something to watch moving forward.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
