Shall the costs of sustainable investment solutions be a barrier for institutional investors?

Stay tuned > Shall the costs of sustainable investment solutions be a barrier for institutional investors?

- June 5, 2023

Pension Funds Blog

by Guido Bolliger

Management and investment costs are supported by pension funds’ beneficiaries. The 2022 Swisscanto Pension Fund Study[1] estimates the investment costs to average 0.5% in Switzerland.

There is an ongoing debate about the potential additional investment costs of sustainable investment solutions. What factors may explain a cost difference between sustainable and non-sustainable investment solutions?

Costs of ESG data

Most of the sustainable data required to manage sustainable products are not publicly available and thus costly. Asset managers may be tempted to report their costs on their clients.

This may have been true up to a decade ago but is not true anymore. First, the asset management industry has become extremely competitive. Nobody can afford to charge these data to end-clients in the institutional segment. The exact same phenomenon occurred with the arrival MIFID. Active asset managers paid for their brokerage research without charging it to the investment funds. Second, the significant increase in the number of ESG products led to significant economies of scale. Asset managers can now amortize the costs of data across a much larger asset base.

Extra reporting required for sustainable solutions

Sustainable funds require specific reporting that is not required (yet) for other investment products. As a consequence, asset managers may be tempted to report these costs on their investors. It may be the case at smaller asset management companies that do not have the technology to automate their reporting. At Asteria, the production of monthly sustainable reporting is fully automated. This is also probably the case by most of the other asset managers that are active in the institutional segment. Furthermore, a minimum level of sustainable reporting will become mandatory for all investment solutions in the forthcoming years. Therefore, there shall be no difference between sustainable and non-sustainable solutions due to additional reporting requirements.

Exercise of shareholder rights and engagement

Most of sustainable asset managers have an active voting policy and engage, either directly or through collective actions, with their invested companies. The time devoted to the exercise of shareholder rights can be significantly shortened by using a proxy voting provider such as ISS or Glass Lewis. However, engagement is time-consuming even if this is done through collective actions. As a consequence, funds whose main selling point is based on an engagement strategy may be more expensive than their peers.

What are numbers telling us?

The Swisscanto study shows that the asset-weighted average investment cost of pension funds with ESG criteria in their regulations report is at 0.48%. This is slightly lower than the 0.5% average. As higher size pension funds are more prone to adopt ESG criteria, this difference may not be entirely attributed to ESG. 

A report published in 2022 by the European Securities and Markets Authority (ESMA)[2] shows that ESG equity UCITS (excluding ETFs) were on average cheaper compared to non-ESG peers. As of the end of 2020, ESG equity UCITS display total costs of 1.5% compared to 1.8% for non-ESG equivalents. Note that the study focused on the products offered in the retail market.

As we see, costs shall not be a barrier for institutional investors who are willing to integrate sustainable products in their global asset allocations. In recent blogs, we discussed performance and risks and showed that there were no significant differences between sustainable and non-sustainable equivalents. Consequently, we can wonder what prevents Swiss pension that have not transitioned to sustainable investment strategies to do good.



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