Sustainable investing has gained significant interest over the past few years from investors, regulators and the media. The trend toward passive investing has also continued over the same period and shows no sign of abating. Combining sustainable and passive investing, however, can lead to considerable challenges. Passively replicating a mainstream benchmark automatically leads to exposure to companies that engage in unsustainable activities, hampering the transition to a more sustainable world. Meanwhile, tracking “sustainable” indices often exposes investors to portfolio tilts and a different risk-reward profile than traditional benchmarks.
There are also significant differences among sustainable benchmarks (or ESG benchmarks). To meet the objectives of earning benchmark-level returns by investing in sustainable businesses, it is necessary to combine a passive approach with a smart method of sustainable selection.
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