Custom ESG Indexing: How Direct ESG Indexing Can Solve Many Responsible Investing Problems

Responsible investments are booming, but criticism has been growing, too. I start by outlining the different dimensions and characteristics of responsible investments. I also describe a free tool to develop bespoke, responsible investment policies that could serve as the basis to select appropriate funds. There are now many standard active and passive, so called responsible mutual funds available. I use a free fund selection tool to show that strict responsibility criteria are only used by rather few actively managed funds. I also describe several conceptual limits of responsible passive funds. In summary, since responsible investments can vary pretty much by investor, most standard funds may not be ideal for investors. Much of the legitimate criticism of responsible investing can be avoided with bespoke portfolios. I outline simple ways to customize responsible portfolios with direct investments, not limited to equity investments. There are many arguments for rather concentrated direct rule-based ESG investments. These (self-indexed) solutions could be efficiently delivered by wealth managers or used by self-directed investors. An (over-)diversification focus of mutual fund providers and investment advisors may be the biggest limitation for the growth of direct or custom ESG indexing. Most of the arguments apply to private and institutional investors alike, although institutional investors will probably diversify more than private investors.