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Alternative Market Briefing

Other Voices: ESG funds perform better with lower costs - ESMA asks why

Thursday, June 16, 2022

Authored by David Naughton and Katrina Smyth from LK Shields, an Irish corporate and commercial law firm.

The European Securities and Markets Authority (ESMA) published a study confirming that funds which include environmental, social and governance (ESG) features were cheaper and better performers compared to non-ESG funds.

In a bid to inform the fund industry on how to make funds more affordable and profitable for retail investors, ESMA considered the possible drivers behind this finding. They found that ESG funds remain comparatively better performing and cheaper, even after controlling for differences in sectoral exposures and portfolio composition, such as ESG funds' orientation towards large cap stocks and developed economies. Further research is required to identify other drivers.

Rationale for Study

An understanding of the costs and performance of funds (both strongly linked) allows investors to make informed decisions and fosters the continuation of increased retail participation in capital markets.

Past analyses of differences in costs and performance between ESG and non-ESG funds found that, even after controlling for the relative youth, growing popularity and larger size of ESG funds, and their comparative share of passive funds, ESG equity UCITS (excluding exchange-traded funds) remained on average cheaper and better performers than their non-ESG peers in 2019 and 2020.

ESMA's study builds on this by seeking to identif......................

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