ESMA Study Examines Cost and Performance Drivers of ESG Funds
The European Securities and Markets Authority (ESMA) published an analysis of the potential drivers for lower costs and better performance of Environmental, Social, and Governance (ESG) funds versus the other funds, between April 2019 and September 2021.
The associated study aimed to test whether additional drivers could be identified to explain the cost and performance differential between ESG and non-ESG funds. The goal was to assess the extent to which portfolio characteristics impact the ongoing costs and gross performance of ESG funds, as understanding the cost and performance dynamics may bring insights for the overall fund industry on how to make funds more affordable and profitable for retail investors. The study builds on past analysis that assessed the difference of costs and performance between ESG and non-ESG funds. The results of past analysis show that ESG equity undertakings for collective investment in transferable securities (UCITS), excluding exchange-traded funds, were cheaper and better performers in 2019 and 2020 compared to non-ESG peers.
Additionally, looking at the potential drivers behind lower costs and better performance of ESG funds, the key findings of the current study show that:
- ESG funds are, on aggregate, more exposed to large caps and more oriented toward developed economies and these exposures are correlated with lower ongoing costs. Also, funds targeting institutional clients, passive funds, and more recent funds are associated with lower costs.
- Funds created as ESG funds present, on average, lower fees than funds that were launched as conventional funds and later converted to ESG funds.
- With respect to differences in sectoral allocation between ESG and non-ESG funds, ESG funds are more exposed to the healthcare and technology sectors, but these differences are not the only driver of the ESG funds’ outperformance.
- Higher environmental risk is associated with higher performance. Funds focusing on the S pillar or on the G pillar outperformed when compared to funds focusing on the E pillar between April 2019 and September 2021.
The study also revealed that even after controlling for fund characteristics and differences in portfolio exposures, ESG funds remain statistically cheaper and better performing than non-ESG peers between April 2019 and September 2021. The study further highlighted the need for research to identify other factors driving these cost and performance differences.
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Keywords: Europe, EU, Banking, Securities, ESG, Climate Change Risk, Sustainable Finance, UCITS, Exchange Traded Funds, Environmental Risk, ESMA
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