A focus on environmental, social, and governance issues isn’t giving asset managers the leverage to charge higher fees — at least those who invest in U.S. stocks.
The ESG scores of the more expensive U.S. equity managers are not significantly higher than those of their peer group, according to the latest study from Investment Metrics, a portfolio analytics company. The study comes as critics have raised concerns that some asset managers are getting into ESG — at least in part — because investors are more willing to pay higher fees for the strategies.
Investment Metrics based the results on a study of 148 U.S. equity mandates. The research firm split the strategies into two groups: those whose managers could charge high-than-median management fees, and those who couldn’t. Investment Metrics then calculated an ESG style-tilt figure for each mandate, based on the MSCI ESG scores of its portfolio holdings. The analytics company found that the group that could charge higher fees had an ESG tilt of less than 1 — meaning these managers did not put more focus on environmental and other issues.
What did lead to higher fees was the size of the mandate. The smaller the mandate, the higher the fee manager could charge clients, according to a previous IM report. “Every new mandate over $75 million obtained a below-median fee, regardless of ESG score,” according to the report.
Brendan Cooper, senior research consultant and the author of the report, said that the findings show that ESG is just one of many components that asset owners believe can help them achieve their desired returns. “Even if the owners themselves want to incorporate ESG, their fiduciary responsibility is still going to dictate their focus on what’s best from a performance standpoint,” he told Institutional Investor in an interview.
But there is one place in which ESG does help managers charge higher fees: emerging markets. In a separate study, IM found that emerging markets managers that charge higher-than-median fees had an ESG style tilt of 1, which indicates that their focus on ESG is significantly higher than their cheaper peers.
Cooper said that EM mandates in general are able to charge higher fees because the stock research process is more complex in less efficient markets. The fact that ESG plays a bigger role in fees for EM managers could come down to the difficulty of analyzing these factors in these regions.
Notably, governance plays a bigger role in EM strategies than in U.S. equity. Regardless of the fees they earn, almost all the emerging markets ESG strategies had an elevated governance score, according to Cooper. In the U.S., however, “there’s a bit of a tilt for governance, but not to the same level that we saw with regard to emerging markets,” he said.
