Research from Arvella Investments investigates whether passive investing can still actively promote sustainability.
Passive funds can promote sustainability actively
Two big forces have shaped the investment management industry in recent years. Many people wish their investment had a positive impact on society, fueling a boom in sustainable investment. For example, sustainable investing topped $30tr in 2018. Many people also wish to avoid “active” managers’ heavy fees, fueling a boom in cheap “passive” (index) funds. For example, index funds owned 48% of US stocks last year.
Such developments beg a question: how could investors mix both? That is, how could investors promote better environmental, social and governance outcomes while paying index managers’ low fees? Such question may seem as paradoxical. Many refer to index investing as “passive” investing. Yet, sustainable index investing tries to address this very demand. So how well do (supposedly passive) index funds promote better ESG corporate practices? And, relatedly, how shall investors select sustainable index funds?
“For a more detailed look at this subject matter please see the original article “Promoting Sustainability Using Passive Funds” (The Journal of Index Investing Fall 2019, jii.2019.1.071; DOI: https://doi.org/10.3905/jii.2019.1.071