Challenges Facing ESG Investors: The Index Challenge
Patrick McDonough explores the challenges facing ESG investors.
Over the past decade, asset owners have significantly increased their contributions to passive equity investments, which often help frame the overall policy benchmark for their equity allocation. This move reflects a growing preference to capture broad market exposures in a cost-effective manner. With an increased focus on ESG, asset owners are faced with the difficult challenge of deciding how to evolve their investments in traditional broad market indices to better capture the goal of improving their ESG portfolio profile. Over the last year, there has been a 40% increase in the number of ESG indexes for investors to choose from. Index providers and asset managers have constructed ever-more sophisticated solutions to try to meet the rapidly evolving investor demand for sustainable solutions. To this end, ESG indexing strategies are a popular choice, but we believe they may be a suboptimal solution for asset owners — from both an investment performance and a sustainability perspective.