Because the practice of investing in capitalization-weighted indexes, like the S&P 500, directs more money to the more heavily weighted stocks in indexes, regardless of the merit or valuation of the stocks involved, we’ve expressed concerns that indexing can lead to self-reinforcing stock market bubbles. To date, the popularity of indexing has seemed almost relentless. However, indexing has come up against another powerful trend—the allocation of investment dollars to stocks on an environmental, social and governance (ESG) basis. Put differently, virtually every index includes some unfavored companies on an ESG basis. You simply can’t practice typical indexing and ESG investing at the same time. Although ESG investing has its own problems…, we sense the popularity of ESG investing is growing faster than the popularity of indexing. Ultimately, ESG investing is a subset of active management—where investments are chosen for specific reasons other than their weights in an index.
Nov 2020