ESG investing does not cost more, research shows

Pension funds performing well on environmental, social and corporate governance (ESG) factors don’t incur higher asset management costs, according to research.

Research by Dutch consultant Gaston Siegelaer indicated that improvements to investors’ ESG policies did not increase costs either.

Siegelaer analysed cost data from 2016 and 2017 at the 50 largest Dutch schemes monitored by the Association of Investors for Sustainable Development (VBDO), and found no correlation between the level of asset management costs – including transaction costs – and their VBDO ranking.

“Schemes with a high ESG score didn’t incur higher costs than pension funds at the bottom of the list,” he said, adding that spikes in costs couldn’t be explained by ESG efforts.

The consultant said the results didn’t need to be adjusted for a pension fund’s scale “as the largest schemes were always high on the VBDO list”.

“Earlier research has shown that there is no link between scale and costs,” Siegelaer said. “Large schemes do have benefits of scale, but usually have larger investments in expensive asset classes, such as private equity and infrastructure.”

An improved ESG score based on governance, policy, implementation and accountability didn’t lead to higher costs, he argued.

Siegelaer found that, for example, the pension funds Detailhandel (€21bn), Hoogovens (€8.7bn) and ABN Amro (€26.5bn) had all improved their ESG scores in recent years, while only Hoogovens experienced higher costs – up by just one basis point. Costs at Detailhandel and ABN Amro fell by the same amount.

According to Siegelaer, the cost level at all three schemes was below average.

He said that smaller schemes in particular were concerned about increasing costs when adopting an ESG approach: “They don’t know where to start and aren’t keen to spend days formulating ESG policy.”

He added that pension funds could start ESG investing without overhauling their investment policy in three ways.

“Pension funds with an active investment policy could, for example, switch from a traditional approach to active investing tasking the asset manager with specifically factoring in ESG considerations,” Siegelaer said. “They could also use indices that take ESG criteria into account.”

A third way of improving ESG performance without additional costs was to combine engagement with a passive investment strategy, according to the consultant.

“A pension fund can compensate the additional costs of engagement through increasing its passively managed mandates based on ESG indices,” Siegelaer said.