ESG Fund Fees: Debunking the Myth

As of March 2024, there were about 5,500 ESG funds available for sale in Europe, amounting to USD 2.5 trillion, according to Morningstar Direct. It’s widely believed that these ESG funds are more expensive to own than their non-ESG counterparts. The Morningstar Sustainalytics team has reported on this misconception before, like in December 2020, but decided to revisit the subject, this time with a larger sample size and a focus on six diversified and popular Morningstar categories, which represent more than 70% of the European ESG fund universe. 

This article was adapted from their most recent report published June 2024: Myth Busting: ESG funds aren’t more expensive than non-ESG funds. It is only a small representation of their many key findings. Download it in its entirety here for free. 

Using both asset-weighted and simple averages at the share class level, we find that European ESG funds, in general, exhibit lower representative costs than their conventional peers.  

As of March 2024, the average ESG fund in six of the most popular Morningstar categories cost 0.82%, while the average conventional fund charged 0.90%. ESG funds were more expensive on an asset-weighted basis until 2021. Their asset-weighted average representative costs were 1.55% in 2013 but declined to 0.99% in early 2021 and dropped further to 0.82% at the end of the first quarter 2024. The 36% cost reduction over the past three years compares to the 18% fee slash among the sample of conventional funds.  

On a simple average basis across the six selected categories, ESG funds cost 0.83%, compared with 0.90% for conventional funds, as of March 2024.

The charts below show that ESG funds exhibit lower costs than conventional funds across each of the six selected Morningstar categories.

The exhibit below shows the active/passive breakdown of our sample of funds across the six selected categories.

In four of the six selected Morningstar categories, ESG funds used to be more expensive than non-ESG funds, when looking at asset-weighted representative cost averages prior to 2018. However, costs of ESG funds across the board have declined significantly over the past decade to become generally lower.

For example, the average representative cost of ESG funds in the Morningstar global large-cap blend equity category declined to 0.56% in the first quarter of 2024 from 1.48% a decade earlier, on an asset-weighted basis.  

In the Morningstar US Large-Cap Blend Equity category, the asset-weighted expense gap between ESG funds and non-ESG funds has been among the tightest since 2018.  

It is in the Global Emerging Markets Equity category that ESG funds have seen their average costs drop the most significantly over the past decade. These costs have seen the greatest volatility, though, compared with their conventional peers, from 2.33% in 2014 to 0.50% in March 2024, on an asset-weighted basis. 

The relatively larger cost reduction among ESG funds over the past decade can be largely explained by the proliferation of new ESG funds in recent years to meet the increase in investor demand. Newly incepted ESG funds have tended to charge lower fees than their conventional peers, as shown in the exhibits below, which compare the expenses charged by newly launched ESG and non-ESG funds, broken down by inception year and investment style (active/passive).  

The newly launched active ESG funds have been cheaper than the newly incepted active conventional funds, whether measured by asset-weighted or simple average. However, the story is more nuanced for passive ESG funds. While on a simple average basis, newly launched passive ESG funds tend to charge less than their new non-ESG counterparts, this is not always the case when looking at asset-weighted averages. In five of the six selected categories, the asset-weighted average costs for passive ESG funds incepted in recent years have been higher than those for their passive non-ESG peers. This suggests that most of the passive money has been flowing into the cheapest new funds and share classes, which tend to be non-ESG plain-vanilla ETFs.  

For example, in 2023, newly launched passive funds in the Morningstar Europe Large Cap Blend Equity category had asset-weighted representative costs of 0.17%, on average, compared with 0.14% for new non-ESG funds. The fee gap is therefore modest. The widest expense gap is in the EUR Corporate Bond category, where in 2023 new passive ESG funds charged 0.15%, versus 0.10% for their new passive non-ESG equivalents.  

Meanwhile, new passive ESG funds in the Global Large Cap Blend Equity category were the only ones that incurred lower costs than their new conventional peers, when measured by asset-weighted average; in 2023, it was 0.15%, compared with 0.17% for conventional peers. 

There’s much more to understand about ESG fund fees. The full report from the Morningstar Sustainalytics team provides more robust commentary and analysis of what’s happening.  

Other topics covered in the full report include:

• A Breakdown by Investment Style Shows Differences Between Active and Passive ESG Funds
• Fees Before and After Rebranding
• Controlling Branding and Manager Qualification
• More Findings and Study Methodology

Download the full report for free here.

The Morningstar Sustainalytics team uses Morningstar Direct to pull the data discussed in their reports. Direct is a comprehensive platform that helps asset and wealth managers build their assets and manage their portfolios by supporting market research, product creation, positioning, marketing, and distribution strategies.

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