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.
Related Links
Keywords: Europe, EU, Banking, Securities, ESG, Climate Change Risk, Sustainable Finance, UCITS, Exchange Traded Funds, Environmental Risk, ESMA
Featured Experts

James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.

Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Related Articles
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.