COMMENTARY: Addressing Stewardship Misconceptions in Passive Investments: Can Indexes Enable Scale Engagement?

Abstract

Passive investing and sustainability engagement were historically deemed at best challenging and at worst incompatible. Now, a growing realization acknowledges that combining index investing and sustainability engagement is not only possible but can reinforce and mobilize significant global assets under management to enable collaborative engagement. By linking engagement to transparent capital reallocation, passive investing has the potential to influence and achieve changes in corporate practices and strategies, which can produce real-world impacts. This article explores the evolution of environmental, social, and governance (ESG) engagement and passive investing and demonstrates that sustainability index design can lead to scalable, efficient, and impactful corporate engagement across entire markets. The use of such indexes to steer investment flows provides clear incentives for companies to improve sustainability performance and deliver the outcomes sought by both asset owners and society at large.