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

The chapter delves into the growing criticisms of responsible investing, such as the use of exclusions and the lack of standard definitions. It introduces custom ESG indexing as a solution, allowing investors to tailor portfolios according to their specific responsibility criteria. The author discusses various dimensions of responsible investment policies, including exclusions, positive criteria, and ESG ratings. The chapter also explores the limitations of aggregated ESG scores and the benefits of using Best-in-Universe (BiU) over Best-in-Class (BiC) approaches. Additionally, it covers the importance of voting, engagement, and signaling in responsible investing. The DVFA Policies for Responsible Investing Tool is introduced as a means to prevent greenwashing. The author also discusses different investment philosophies and the growing interest in direct indexing for custom ESG portfolios. The chapter concludes by emphasizing the need for bespoke portfolios to address legitimate criticisms of responsible investing and outlines the advantages of direct ESG indexing for both private and institutional investors.