Europe

Article 9 Fees Discounted in Short Term

Fees fall significantly in some ESG and impact strategy types as different sectors mature.

A new report has revealed a reduction in the cost of active global equity strategies with ESG characteristics and suggests a brewing price war between managers as asset owners increase their focus on sustainable investments.

The median fee for a €100 million mandate has decreased by 14% since 2016, while recent discounting has temporarily flattened out price differences between funds categorised under Article 8 and 9 of Europe’s Sustainable Finance Disclosure Regulation (SFDR).

A study from consultants bfinance revealed that institutional asset management fees have fallen significantly across asset classes, particularly for certain ESG or impact strategy types.

“Pricing compression is evident in well-established strategies such as ESG equities and renewable energy infrastructure. Meanwhile, newer strategy types such as impact equities and Article 9 funds are offering substantial discounts versus rack rates,” said the report.

“There’s a lot of discounting currently,” Kathryn Saklatvala, Head of Investment Content at bfinance told ESG Investor. “Asset managers are saying ‘this will be the price for an Article 9 fund but right now it’s lower’ and using their official price. But at the same time, we are seeing these large discount percentages,” she said and explained that like many new market entrants the discounting of funds is aimed at increasing interest and market share, especially by new entrants.

However, Saklatvala said Article 9 funds would attract higher fees in the longer term. “There’s more reporting for impact funds, which represent a substantial proportion of Article 9, so there are bigger teams they need to employ to focus on the data and metrics. For impact strategies, There is client reporting that is needed for who they target. There are non-financial goals to cost for alongside the financial one,” Saklatvala said.

Currently, 30% of managers are offering upfront discounts for Article 9 strategies, but despite this, they only have a slightly higher median fee and quartile fees than Article 8.

SFDR Level 1 came into effect on 10 March and asks asset managers to sort their ESG funds and other investment products into Article 8 (promoting environmental or social characteristics) or 9 (having an environmental or social objective). All other funds fall under Article 6. Level 2 will ask asset managers to provide the underlying evidence supporting these categorisations in line with the EU’s Green Taxonomy.

Fund fee decreases

The fund fees decrease has been significant over the past five years, the report said. The median fee for active global equities strategies with ESG requirements was down 14% since 2016. US high yield and multi-sector fixed income median fee was down 15% since 2017. fund of hedge funds median fees fell by 42% between 2010 to 2019, however, the decline here has now stopped.

Investors are seeing a notable erosion in fee levels for a number of ESG and impact-oriented strategies, the study said. Some ESG-related sectors are now becoming relatively mature, often characterised in pricing terms by narrower dispersion in fee quotes and more clustering around certain fee-points as well as overall price compression.

Last year, a study by Morningstar, showed that ESG-themed funds were typically cheaper than non-ESG funds for European investors.

“In the light of investors’ growing interest in ESG and impact strategies, it is interesting to see reductions in the fees that managers are quoting for clients,” said Saklatvala. “We will be watching how pricing evolves for some of the more nascent sectors, such as Article 9 funds and impact real estate, where there is more uncertainty around what an appropriate fee should look like.”

In the renewable energy infrastructure sector, a key ESG market, there has been maturation, the report said, which benefitted investors with significant fee reductions. This contrasted with stable infrastructure pricing in other sectors.

“The research found a reduction in quoted base fees for global renewable energy infrastructure strategies, with the median quoted fee for a US$50 million mandate down 10 basis points versus 2016, which was a fall of 8%, and a fall of 21 basis points in the upper quartile, which was a fall of 14%.”

Saklatvala said demand is accelerating the maturity of the renewable energy infrastructure universe compared with areas including impact real estate

“You see funds changing their profile and taking on more operational wisdom within a development risk or construction risk,” she said.

“In impact real estate, investors aren’t quite sure what returns are appropriate. They aren’t quite sure what to pay. There is less embedded understanding in the consulting community about what is the breadth of opportunity and what returns they can expect from them,” she added.

Saklatvala added there was more reputational risk with real estate funds versus renewable energy, partly due to lower pressure on mistakes or controversies surrounding wind power farms, compared with social or affordable housing schemes.

The survey also saw less dispersion in the fees being quoted by managers. This, the report said, is “a pattern that is characteristic of a maturing sector, where price discovery over time leads to a greater awareness of what competitors are likely to charge for similar products and a reduction in the more extreme quotes.”

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