The investment industry is changing. Among other things, there is growing demand from both retail and institutional investors to align their capital with better environmental and social outcomes, and more resources going into index fund or quasi-indexing products. These two trends may seem separate—or, some people believe, incompatible—but together I believe they have the power to improve finance’s role in the world. Index funds can be a force for sustainable capitalism.
Can Index Funds Be a Force for Sustainable Capitalism?
Today, more and more investors are prioritizing ESG metrics when they assess potential investment opportunities. At the same time, index funds are rapidly growing in popularity. What will it take to overcome “free-rider” problems and effectively incentivize businesses to make a more positive societal and environmental impact? In this piece, the author argues that one approach financial institutions should consider supporting is “pre-competitive collaborations,” in which companies jointly develop industry standards, generate useful data, and drive product development. He goes on to discuss what types of investors are most likely to engage with companies in this way, as well as the short- and long-term benefits of more proactively supporting these ESG-focused businesses.