Article: ESG score helps win new mandates in U.S. equity, but shows little influence on fees

Brendan Cooper | April 26, 2022

In response to growing demand from U.S. institutional investors for the incorporation of environmental, social, and corporate governance (ESG) analysis, we released an article in February which examined the correlation between ESG integration and fees in emerging markets equity. (Emerging Markets Equity Managers Who Evaluate ESG Risk Well Earn More Mandates and Charge Higher Fees) One of the follow up questions we were asked from the article was whether we have seen a similar trend in U.S. equity. Our research shows that while a higher ESG score may help win new mandates, it has less of an impact on the fee that U.S. equity managers can charge.

The post-negotiated manager fee information is from the Investment Metrics Fee Analyzer, which has over 70,000 fee observations across 65 investment styles. For this analysis, we reviewed the fees of new U.S. large cap equity mandates that were awarded over the most recent three-year period through December 2021. There were 148 new mandates reviewed from 57 different products, representing 51 different asset management firms.   

Summary of findings:

  • Similar to the emerging markets equity space, there is a correlation between new mandates and governance, but not as significant as we examined previously.
  • Unlike the emerging markets equity space, there was no discernable difference with regards to those that obtained above median fees and the asset managers most focused on evaluating corporate governance risk.
  • The strongest signal within U.S. large cap equity was size of mandate.  Every new mandate over $75m obtained a below median fee, regardless of ESG score.

To review the ESG scores for the products gathering assets, we used our Style Analytics Peer Style Skyline – a proprietary tool to demonstrate how a fund stands out from its peer group. The graph below shows the quartile breaks of the U.S. large cap equity products which obtained above median fees and their MSCI ESG scores. Any style tilt greater than 1 or less than –1 indicates the portfolio is significantly different from the benchmark for the specific factor. The “MSCI ESG Overall” median figure for this group of successful managers is less than 1 and showed no significant difference versus the 57 products we examined (See Appendix for the graph).     

Appendix: Overall

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