ClearGlass: Passive ESG funds provide value for money

The report was drawn from deal-specific fee data collected from the Cost Transparency Initiative, which it said differs “substantially” from data from benchmarks provided by third-party consultancies.

Consultancy data “is often misaligned with the realities of the market”, and risks giving institutional investors an inaccurate impression of “competitive ongoing charges”, ClearGlass argued.

The report also utilised the company’s proprietary database for global passive equity funds. The database comprises “core funds”, which include 349 mandates, 121 schemes and 15 managers; ESG funds including 89 mandates, 30 schemes and four managers; Research Affiliates Fundamental Index funds (71, 30 and three, respectively); and minimum volatility funds (32, 15 and three).

Claims about the over or underperformance of ESG funds compared with non-ESG equivalents are contested, with a study last year from Scientific Beta suggesting that much of the overperformance commonly claimed by ESG advocates is in fact owed to non-ESG factors, such as high profitability and conservative investment.

That research also suggested that ESG fund performance was inflated by the surge in attention given to ESG since 2013, and could well fall away should that attention begin to wane. 

The ClearGlass report argued that ESG funds are cheaper and do in fact outperform, however, seemingly refuting the common concern that investors must trade returns for sustainability.

Among its findings was the prospect of economies of scale in global passive equities, albeit these fade away at higher asset under management levels, suggesting investors may have to “negotiate harder” as they increase from “very small” to “small-to-medium sized allocations” but “not beyond this”.

The report found no evidence of a link between performance and charges. Aaron Brown, Bloomberg columnist and former AQR managing director, noted in an article in May 2021 that many ESG funds charge “outrageous fees” for results that differ little from the S&P 500, and the ClearGlass report argued that the lack of any correlation between performance and charges means investors “should aim for the lowest-cost option”.

The research also found evidence that charges for ESG funds are dropping rapidly. While overall charges for core funds — encompassing total, transaction and ongoing charges — had remained largely stable, the rapid fall in charges for ESG funds suggests “better overall value for money in comparison to non-ESG funds”.

Dr Christopher Sier, research director at ClearGlass Research, said: “The report started with the objective of investigating the entire universe of global passive equity findings, but its strongest finding is focused on a niche segment of the market, namely that ESG-focused passive equity funds provide better value for money than non ESG counterparts — this is true across both costs and performance. 

“The report also suggests that the positive trends across costs are likely to continue in the ESG passive equity space, with a clear trend of fees decreasing at a much more pronounced rate than any other segment of the passive equities market.”