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OPINION

What the ESG boom means for fund fees

What the ESG boom means for fund fees
December 6, 2021
What the ESG boom means for fund fees

Demand for funds has started to come off the boil. Recent data shows UK investors put a total of £1.7bn into open-ended funds on a net basis in October – the lowest monthly amount in just over a year. The Investment Association (IA) puts it down to a “wait and see” attitude as people grapple with uncertainties on the inflation and interest rate fronts.

But momentum persists elsewhere. Environmental, social, and governance (ESG) investing is still pulling in the punters, with nearly £1.5bn (net) going into so-called responsible investments for the month. This 'responsible' category, used in the IA's data, has suffered just one monthly outflow so far in 2021. Overall, these funds have taken on nearly £13.2bn in net flows over the first 10 months of this year, accounting for more than a third of all fund sales.

It’s quite the sales bonanza, and the weight of money going into such products has become increasingly visible in the results of asset managers with strong ESG franchises, such as Liontrust and Impax Asset Management. For some, this trend might solidify all manner of concerns, including the worry that ESG investing is quickly morphing into a bubble. But I wonder if a silver lining could soon emerge for fund watchers?

Specialist portfolios tend to come with higher charges, as evidenced by the prevalence of performance fee structures on investment trusts that invest in alternative asset classes. The picture is admittedly more mixed with ESG, but some funds, both active and passive, appear to charge a premium to reflect their extra due diligence. That also applies to some of the thematic exchange traded funds (ETFs) capturing positive trends.

The increasingly wide adoption of ESG-minded investment philosophies and the proliferation of passive ESG products have put pressure on fees. The volume of money flooding into ESG portfolios should only add to this, as fund managers are urged or decide to pass economies of scale on to investors. That has already happened in the institutional space: according to a November study by consultancy Bfinance, global equity ESG fund fees have fallen 16 per cent since 2016.

But what do the biggest active ESG names charge? This varies notably. One of the better known global names, £2.2bn Liontrust Sustainable Future Global Growth (GB0030030067), charges 0.88 per cent, compared with an 0.53 per cent ongoing charge for £3.2bn Baillie Gifford Positive Change (GB00BYVGKV59).

Others look pricier: while its literature lists one much cheaper share class, a look at what's available on major retail investment platforms suggests that FP WHEB Sustainability (GB00B8HPRW47) charges a little over 1 per cent. And in the investment trust space Impax Environmental Markets (IEM) has an investment management fee of 0.9 per cent on its first £475m of assets, with this falling to 0.65 per cent above that threshold. The trust currently has around £1.5bn in total assets.

As investors scramble for ESG portfolios there is a certainly a rationale for backing names that have achieved scale on the back of an established process with a decent track record. There are no obvious signs of investors being up in arms: as noted, ESG remains in vogue, and Impax Environmental Market’s popularity has helped its shares trade on a chunky premium to the value of underlying assets as of the start of December. But in both the active and passive space, let's hope fees become as keenly discussed for ESG portfolios as they are for 'conventional' counterparts.