The High Cost of ESG Investing. Is it Worth it?
What is ESG?
Environmental, social, and governance (ESG) is the newest trend in investing that has seen explosive interest among investors. Morningstar reports a nearly 50% increase in the number of ESG funds available from 2019 to 2020 alone.
The investment management industry has responded to the demand for ESG investing by launching “socially responsible” mutual funds and ETFs dealing with the environment (e.g., carbon emissions), social issues (e.g., employee treatment), and governance (e.g., executive compensation).
It has seen so much growth that the Securities and Exchange Commission (SEC), which regulates the industry, in April 2021, stated that it had identified several asset managers that were misleading investors by marketing funds as ESG-friendly but not making investment decisions consistent with such marketing, or, in some cases, not even having a mechanism to track or ESG performance.
What does the research say about ESG Performance?
Essentially, the research is mixed. Some research was saying that ESG has no evidence that the funds outperform non-ESG.1 Other research showing that comparing the ESG with non ESG performance, there was no significant difference of superior performance of the ESG based portfolio, arguing in favor of the ESG strategy being preferable to all investors.2
What about Fees?
One of the significant issues with ESG funds is the higher expenses. Exchange-traded funds that explicitly focus on socially responsible investments have 43% higher fees than widely popular standard ETFs.3
The environmental, social, and governance funds’ average fee was 0.2% at the end of 2020, while standard ETFs that invest in U.S. large-cap stocks had a 0.14% fee on average.
Why Invest in ESG?
Investing would be beneficial, especially to those who feel more comfortable about investing in important causes. So, in the end, it is a preference call for individual investors to weigh the pros and cons outlined in this blog post to determine if ESG investing is right for you.
Talk to a Financial Planner?
Given that this industry is new and is most likely has uncertain asset returns than other funds, you should talk to a financial advisor to better evaluate ESG funds. The research does show mixed results of these funds on their socially responsible goals they are trying to accomplish. At this point, the fees are generally higher, and the performance is not sure to be better than traditional ETFs. But one would expect that costs would come down over time as more competition arrives in this market.
1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3400628
2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3498354
3. https://www.wsj.com/articles/tidal-wave-of-esg-funds-brings-profit-to-wall-street-11615887004
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
