There are different approaches to creating Sustainable Investing (SI) portfolios and indexes. Some use exclusion lists, others stock picking, tilts, optimisations or various combinations of the above — these choices have an impact on the performance of portfolios, and investors are frequently concerned with the relative performance or tracking error of their SI portfolios compared to the underlying universe benchmarks.
In this paper we look at factor, country and industry biases as well as the performance impact of unconstrained ESG tilts. The latter typically preserves the structure of the underlying market capitalisation index and deviates less from the underlying benchmark than some other approaches.
