Capitalists or Fiduciary Conscious Agents? ESG Mutual Fund Fees and Investor Sophistication

Gil–Bazo and Ruiz–Verdú (2009) show that fund families strategically exploit the low performance sensitivity of investors, i.e., investors’ low elasticity of demand with respect to performance, to increase fund fees. Given that environmentally, socially and governance (ESG) focused investors are recognised as those who put a higher weight on non–financial preferences in comparison with non–ESG focused investors and, consequently, ESG investors appear to be more “patient” with poorly performing funds, we ask the question of whether fund families exploit ESG investors’ lower performance sensitivity and charge them higher fees. We use a sample of 2,055 U.S. equity mutual funds to test this hypothesis and find that fund families do exploit retail ESG investor’s low performance sensitivity when setting fees of ESG funds. In contrast, we find no evidence of such practices in the sample of institutional funds. Moreover, we find that the exploitative fee setting practices observed in the retail sample are driven by marketing fees and not by operating fees