ESG Fees

ESG Fees

One of the most persistent myths around ETFs that are focused on environmental, social and governance (ESG) factors is that investors will have to pay a premium for green exposure.

Last time, we debunked the myth that the ‘premium’ in question would be sacrificing returns. This time, let’s look at the other more common use of the word ‘premium’ – that is annual fees.

As most investors who are interested in ETFs know, there has long been a race to the bottom on annual charges. While most actively managed funds have the audacity to hover between 0.75% and 1% per year, depending on the asset class and strategy, ETFs have been falling as if there is no gravity. Investors can pick up an entire portfolio for just a couple of basis points – and as US publication discovers every year, the price just gets lower (it hit 0.05% in 2017).

But now the competition is not just affecting the mainstream exposures. Sticking to the US for a moment, where industry moves tend to be felt first, found that the world’s cheapest ESG-focused ETF portfolio only cost 0.167% – a drop from 0.21% in 2018 – and a third of the price of the average equity ETF in the US.

Now let’s turn to Europe. Morningstar’s 2019 report, A Guided Tour of the European ETF Marketplace, found that prices are falling not only in the land of smart beta ETFs but also ESG ETFs.

‘There has also been increased fee competition in the field of ESG-focused ETFs. In fact, the launch in 2018 of aggressively priced ETFs by iShares, Xtrackers, and L&G was something of a milestone,’ it reads. ‘With ongoing charges ranging from 0.05% to 0.20%, investors can now buy a range of sustainable portfolio building blocks without having to pay a premium for the privilege.’

The data on average fees backs this up. Morningstar revealed that while the average annual fee of an equity ETF in Europe was 0.33%, the average fee for such an ESG ETF was just 0.30%.

The fact that not only is ESG relatively cheap, but even, on average, cheaper than its non-ESG counterpart is a vast turnaround from earlier years. As I wrote for Investment & Pensions Europe last year, data from Lipper found that, as of June 2018, the average annual fee for ESG ETFs in Europe was 41 basis points, compared with 37 basis points for normal equity ETFs – and since 2016 the prices in each category had only fallen by 0.02%.

The fall in price between 2016 and 2019 is surprisingly high given there are less than 40 ESG ETFs in Europe – hardly enough, one might think, to justify such fierce competition.

However, the 2019 Morningstar report added that “the bulk of ETF fee cuts has continued to affect mainstream–mostly equity–market exposures”. Mainstream US equity is as cheap as 0.04% from JP Morgan in Europe, and providers like Amundi offer fixed income ETFs starting at 0.05%.

But not everything is cheap. Certain asset class prices like emerging market debt and equity will take longer to fall than mainstream equity.

So, what will make ESG fees fall, and faster?

Competition and scale – the same factors that affect all ETFs.

We have already mentioned the competition is heating up. And scale is definitely building. (Although there are some funds that have been lagging in assets and might not even break even in terms of running costs). But others are doing very well. For example, the largest ESG ETF in Europe is the UBS ETF MSCI World Socially Responsible UCITS ETF and it has around £867 million in assets.