Should you go with an active manager or index fund to execute your sustainability-driven strategies?
Whether or not you use an active or indexed approach to pursuing your ESG investment goals probably depends on who you ask. But the evidence is strong that index funds might be the wise choice. Here’s one reason why that’s the case. Go here to learn two more reasons.
Better data means ESG indices match key sustainability goals
There are very few ESG investment objectives that can’t be achieved using the right indices built with the right data. One major biproduct of the trillions’ worth of money that’s flowed into passive funds over the past decades is the increased investment by index providers into the quality, innovation, and breadth of their range.
Take MSCI, for example. The company employs 185+ dedicated ESG analysts, provides ESG ratings for over 6,500 companies, and runs more than 1,000 equity and fixed income ESG indices.1 With MSCI’s 40 years of experience collecting, scrubbing, and standardising ESG data, even active managers rely on their data to create sustainable strategies.
Thanks to these improvements in data quality, indices available today reflect all sorts of ESG policies: from negative-screening or exclusions, to implementation of specific values, selection based on global ESG ratings or carbon ratings, and alignment with the UN’s Sustainable Development Goals. All these varied objectives can be codified in indices.
Some ESG benchmarks can be used as portfolio cores, and can easily substitute traditional market-capitalisation weighted indices, with limited tracking error. Others are more values-oriented or based on sustainability themes, and are therefore used as diversifiers, whenever implementing those convictions justifies a higher tracking error.
Overall, better indices mean better ways to invest sustainably in a consistent, targeted, rules-based way – an important consideration for ESG investors looking to make lasting positive change.
1 Source: MSCI ESG Research as of November 2018. Includes full time employees and allocated staff performing non-investment advisory tasks.