The EU’s securities regulator ESMA has questioned the “relative cheapness of ESG funds” compared with non-ESG ones given the “extra costs they incur”.
In its fourth annual statistical report, which was published yesterday and included an increased focus on ESG UCITS, ESMA described the average price difference as “somewhat counterintuitive”, given the additional analysis needed to implement the ESG element of such strategies compared with non-ESG peers.
ESMA found that total costs associated with its sample of ESG funds were on aggregate 0.1 percentage points below those of non-ESG ones at 1.4 percent, based on data from 2020.
Lower costs, it suggested, could reflect growing competition in the fund industry. But ESMA added that this alone “does not fully account for the difference between ESG and non-ESG fund costs” as “new ESG funds remained on average cheaper than new non-ESG peers”.
ESMA added that “further work” will be needed to “understand the underlying factors driving the relative cheapness of ESG funds”.
The financial watchdog also found that in 2020 ESG funds provided better returns, with the gross performance of ESG UCITS on average two percentage points higher than non-ESG UCITS funds at 1.9 percent.
That outperformance was driven by the “strong performance of specific sectors since the Covid-19 crisis”, such as technology and healthcare, which are “overrepresented in ESG equity indices and portfolios”, ESMA stated.
Impact funds performed better than other ESG strategies, ESMA found. For instance, the net performance of equity impact funds stood at 2.7 percent in 2020, according to ESMA, compared with 0.5 percent for funds with other ESG strategies and -0.03 percent for funds employing exclusions only.
Funds with sustainable investment as their objective also outperformed those “promoting environmental or social characteristics despite slightly higher costs”.
ESMA’s analysis only addressed the financial performance of the products, not the “non-financial performance of sustainable investment products”.
ESMA also reported that net flows into EU-based ESG UCIT funds – equity, bond and mixed ones – further accelerated throughout 2020, to the tune of €67 billion. By contrast, over the same period outflows from non-ESG funds in the same asset classes was €119 billion.
The number of new ESG ETFs launched in 2020 also outpaced for the first time the number of non-ESG ones.
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