While sustainable investing has experienced turbulence in the past few years, ESG spending has “increased materially” for 89% of asset managers in the past three years according to research by Bfinance.
Yet the fees surrounding ESG investing caused some separation in belief between asset managers and retail investors, with near 70% of investors agreeing that strategies should be priced comparably across higher and lower-rated ESG resourcing requirements, while only half of asset managers do. Region also acted as a differentiator, with less than half of US fund managers believing strategies with higher ESG resourcing should be more expensive, while about three quarters of those in France and Germany believed it should be more expensive.
In addition, while 91% of investors say ESG charges should be part of the management fee for the fund, just near 70% of asset managers think this should be the case. Less than 50% of asset managers in the private equity or real estate and infrastructure space believe these fees should be included.
“Asset managers must navigate available paths as costs increase. These may include absorbing the additional expenses at firm level (reducing profit margins or finding other efficiencies to compensate), passing them to the broad client base, or sharing them over strategy-specific client bases that make heavier use of relevant resources as part of management fees and/or via ad hoc charges,” the report stated.
“As has been noted, this may also be a factor inhibiting ongoing fee compression. As costs mount, the choices become more meaningful and less straightforward.”
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The study, which surveyed 659 asset managers and asset owners, also noted a lack in fee reductions across asset classes except for in the real estate sector, where the median management fee has reduced from 0.6% in 2020 to 0.55% in 2023.
Peter Hobbs, managing director of private markets at Bfinance, said: “While 2024-5 may be considered a good vintage for real estate investing in general, it is also a good time to be negotiating—or renegotiating—fee terms.
“There are clear signs of a reduction in fees across most real estate segments, particularly for REITs and open-end funds. Compression is particularly severe in certain geographies. In the UK, for instance, median REITs pricing is down by five basis points: real estate demand in this market has been affected by the dual pressures of weak performance and the evolution of client segments (such as corporate pension plan derisking).”
Hurdle rates have also remained relatively unchanged across alternative asset classes, according to the Bfinance report, despite returns in areas such as hedge funds and private debt increasing significantly. Earlier this year, Bfinance publicly called out the industries for maintaining hurdle rates while returns increased.
