Money managers in Europe said they are gathering more assets thanks to the explosion of investor demand for sustainable investment strategies in recent years, but they aren't yet charging higher management fees for ESG strategies even if their costs have increased.
Adam Gillett, head of sustainable investment at Willis Towers Watson PLC, said that the costs involved in meeting the standards of the European Union's Sustainable Finance Disclosure Regulation are significant.
"Where permitted and appropriate, managers may be including some of the expenses in fund costs directly. Other costs will have to be borne by the managers, which in effect is likely to place an indirect cost on end investors. So however the costs are dealt with, end investors will likely feel the impact in some form," he said.
But money managers in Europe say they haven't increased management fees to cover the costs associated with disclosures.
Average ESG-labeled equity fund management fees stand at 0.78% annually while the corresponding non-ESG funds charge 0.8%, according to an analysis of strategies covering $500 billion in assets by an independent London-based research house FitzPartners Ltd, which specializes in fund fee calculations.
ESG-labeled bond fund management fees total an average 0.5%, while non-ESG fees are higher at 0.53%.
"We want to offer clients full range of sustainable strategies and it's not a goal of ours to generate higher fees (on these products)," said Masja Zandbergen-Albers, head of sustainability integration at Robeco, in a telephone interview.
"It's very much a growing market and it is giving us a competitive advantage that we are strong in this area," she added, speaking about sustainable investments.
"What we have seen is that sustainable, sustainable thematic and Sustainable Development Goals- focused strategies have grown massively over the last five years," she said.
These equity, fixed-income and multiasset funds accounted about 22% of Robeco's AUM or €37 billion at the end of 2022, up from about 6% in 2017. Robeco has €171 billion ($185.3 billion) in assets under management.
Julie Moret, global head of sustainable investing and stewardship at Northern Trust Asset Management in London, also said: "We have not changed the fee structure."
Ms. Moret added that costs have increased for managers as they needed to source new data to better document and disclose ESG investments under SFDR.
Ms. Moret added that managers also have had to add resources to facilitate regular disclosure updates about ESG investments to investors as reporting requirements have also been increasing under SFDR.
Managers choosing to repurpose existing funds to meet demand for ESG strategies are also facing increased costs, said Hugues Gillibert, CEO of FitzPartners in London.
"Unlike new fund launches, these funds new to the ESG universe have not altered their pricing while transitioning to ESG, (which has) inflated the overall ESG funds' costs," he said.
