People often assume that ESG funds are more expensive than conventional portfolios due to the extra costs required for specialist data, research and expertise, but that is no longer the case, according to a new study from Morningstar.
It found that the ESG funds in six of the most popular Morningstar sectors charged an average fee of 0.83% (weighted to their size in the index), while their conventional peers had fees of 0.90%.
It is true that ESG funds were more expensive at one stage, but the launch of many new sustainable strategies has made the area more competitive, which has resulted in lower fees.
While funds across the board were generally more expensive a decade ago, the average ESG fund charged fees of 1.55% compared with the average fee of 1.32%. Their historically higher charges have led investors to believe a myth that has since become outdated, according to Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
She 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.”
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Indeed, Morningstar found that funds which converted to ESG strategies between 2018 to 2023 actually lowered their costs by 20 basis points on average in doing so.
When rebranding activity reached its peak in 2021, more than half (60%) of the funds that converted that year maintained or lowered their fees.
This was the case with new product launches too, with active ESG funds charging lower fees than newly launched non-ESG funds over the period.
The only exception was passive ESG funds. They were more expensive in two of the three Morningstar sectors analysed (weighted to their size in the index), which could be owing to the fact that the most popular non-ESG funds in the group are “plain-vanilla” tracker funds that can charge minimal fees.
This article was originally written for our sister publication, Portfolio Adviser
