Where conventional passives invest across a market as it is, those with a values-based tilt tend to track an index that accounts for how a market’s constituents score on other criteria, such as how environmentally responsible they are.
“Conventional investment market indices like the S&P 500 or FTSE 100 tend to reflect a set of companies proportionally according to their market capitalisation,” explains Matthew Toms, of Heartwood Investment Management.
“Socially responsible investing indices go a step further, incorporating sustainable investment factors into their composition. This could mean only including those companies which score most highly on ESG issues.”
Like active ethical funds, index trackers with a specific tilt appear to have held up in performance terms versus their traditional counterparts.
Mr Toms notes that SRI indices have performed “very similarly” to their conventional counterparts over the longer term. And over the past 12 months some SRI indices, such as MSCI World SRI, have outperformed their unscreened counterparts.
All this means that investors with a preference for passive can follow the same approach when it comes to investing in line with their values. The usual dynamics apply: passives tend to be cheaper than active and, in many areas, can be difficult to beat in the longer term.
But as always, certain active managers will do well in the long term, and may be better placed to protect investors in a falling market.
However, investors considering passive ESG funds, like those buying active, need to consider if the fund they are using gives them the exposure they want.
This can be tricky not just because investors can have very idiosyncratic views on ethical issues, but also because investment processes can vary hugely.
For example, active managers can choose whether to screen out companies that rate poorly on certain criteria, screen positively for those that do well on these metrics, carry out both exercises, or take an entirely different approach.
This, and the exact metrics managers use to assess potential investments can also vary.
This means that investors need to be aware of what exposure they are getting.
It also creates a risk of certain undesirable investments being inadvertently included in a portfolio if the screening approach is not robust enough.
When it comes to passive, this is also a potential risk.
Here, investors need to be aware of how tilted indices are constructed and exactly what criteria are being used to put them together.
In the listed equity space, a high level of transparency means due diligence on issues such as these should be possible.
But one active manager has argued that, for now, they retain an upper hand in the fixed income world.
Graeme Anderson, chairman of 24 Asset Management, said a lack of data meant it was a “major challenge” for fixed income indices to incorporate ESG.