The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a study – The drivers of the costs and performance of ESG funds – looking at the potential reasons behind the relatively lower ongoing costs, and better performance, of environmental, social and governance (ESG) funds compared to other funds, between April 2019 and September 2021.

ESMA recently determined 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. Understanding the cost and performance dynamics of ESG funds is of particular interest as it may bring insights for the overall fund industry on how to make funds more affordable and profitable for retail investors.

This study builds on past analyses* by assessing whether portfolio composition can help to understand the cost and performance differentials between ESG and non-ESG funds, is looking at some of the potential drivers behind this relative cheapness, and outperformance, of ESG funds. Its underlines several differences between the two categories of funds:

  • ESG funds are more oriented towards large cap stocks;
  • ESG funds are more oriented towards developed economies; and
  • The sectoral exposures also differ between ESG and non-ESG funds.

“The analysis demonstrated that higher environmental risk is associated with higher performance. This apparently counterintuitive result can be explained by the outperformance of funds focusing on the S pillar or on the G pillar compared to funds focusing on the E pillar between April 2019 and September 2021.”

Even after controlling for these differences, ESG funds remain statistically cheaper and better performing than non-ESG peers.

Further research is thus needed to identify the other factors driving these cost and performance differences.

The study The drivers of the costs and performance of ESG funds is avaiable here.

Source: ESMA

* The following analyses rely on an initial databaseb containing 9 866 equity UCITS17 funds domiciled in the EU and operating at the time of the extraction (December 2021).