The Indispensable Role of Indexes in the Evolution of Sustainable Investing

New investment strategies call for new benchmarks. The evolution of sustainable investing over the past three decades has demonstrated the validity of this statement. To facilitate investment, indexes are used as the basis of investment vehicles by passive managers and as investment universes by active managers. As benchmarks, they provide an ongoing time series of return, risk, and financial fundamental data. For environmental, social, and governance (ESG), climate, and impact strategies, indexes also play an important role by defining and measuring sustainability standards and characteristics. As sustainable investing has grown in popularity and sustainable investing strategies have expanded beyond ESG analysis to encompass climate and impact, indexes serve a crucial function, establishing sustainability standards and measuring sustainability characteristics. This chapter shows how classical finance theory broadened the use cases of indexes; provides a brief history of sustainability indexes; and explains how sustainability indexes contributed to improvement of ESG research and advancement of sustainability strategies by answering critical questions about ESG risk and opportunity, carbon intensity, and net-zero pathways, in addition to measuring financial performance and risk. Situated at the intersection of the passive and sustainable investing trends, indexes are cornerstones of this maturing and increasingly influential set of investment practices.