ESG Funds and Fees

Morningstar's Ian Tam looks at the cost of active management around sustainable equity funds

Ian Tam, CFA 17 November, 2020 | 12:49AM
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Ian Tam: Recently, Canada has seen an acceleration in growth of sustainable investments with 31 new products launched in 2020 alone. Our data shows that sustainable assets within the retail market in Canada top C$10 billion for the first time at the end of Q3 or last quarter. Let's talk a little bit about how we define sustainable investments.

At Morningstar, we define three approaches to sustainable investing. Number 1, funds that use environmental, social, and governance criteria at the core of the security selection process. Number 2, impact funds, or those that seek to make a measurable difference or impact around specific themes like gender and diversity, alongside with gains for the investor and Number 3, environmental sector funds like those that invest broadly as an example in renewable energy. Now remember that these three approaches are not mutually exclusive, so you can often find funds in Canada that use more than one of these approaches.

On this basis, we've identified 115 sustainable investments from Canadian domiciled fund managers, excluding fund of funds. Now, although the myth that investing sustainably sacrifices performance is beginning to melt away amongst retail investors. Many might also start to wonder whether investing sustainably actually costs more in terms of fees or management fees.

To answer this question, I calculated the median asset-weighted net expense ratio on sustainable and traditional funds domiciled in Canada, and I separated them out by broad asset class. Allocation funds are those that hold a mix of stocks and bonds, have a median net expense ratio of about 2.09% while non-sustainable investments have an expense ratio of about 1.98% a difference of about 11 basis points. A similar differential exists for fixed income funds. Now surprisingly sustainable equity funds actually show a lower median net expense ratio when compared to traditional peers.

All this said, it's worthwhile to note that the majority of funds launched this year happen to be passive or index products, which generally point to lower fees. We'll continue to keep a close eye on fees, but as it stands, it doesn't seem like investing sustainably through Canadian domiciled fund managers cost substantially more or less when compared to their traditional peers. For more information about sustainable investing, click the link within the transcript to this video to look at the latest quarterly report.

For Morningstar, I'm Ian Tam.

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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