There are three principal types of sustainability index:
- Ethical exclusion indices - which are constructed by screening out companies exposed to 'undesirable' industries and business activities or companies that contravene religious principles
- Broad sustainability indices – which are constructed from top-down by filtering a conventional market index through broad-based sustainability (often ‘best-in-class’) screens
- Specialist thematic indices – which are constructed from bottom-up by identifying stocks exposed to specific activities or issues. Renewable and clean tech indices are common; climate change indices are becoming more so. There are also a number of esoteric single-issue indices (e.g. human capital management indices etc.)
Usage of SRI indices
Indices are used by providers of investment products in a variety of ways:
- As weighted constituents lists against which to manage:
- passive funds
- ETFs
- structured products
- As benchmarks for actively managed funds (although many active SRI fund managers use mainstream benchmarks)
- As stock universes for active fund management (rarely)
