From screening to strategy: Rethinking indices for sustainable outcomes

Sustainable investing has come a long way from its early days as a values-based exercise in screening out heavy emitters. Today, it takes a highly disciplined and sophisticated approach — one that asks how risks and opportunities are priced in a world where climate, nature and governance are no longer peripheral concerns but central determinants of financial and economic outcomes.

At the RIAA Conference Aotearoa New Zealand 2025, this shift was impossible to miss. Polls showed most investors were confident that index-based strategies can deliver sustainable outcomes. The key insight, though, is that effectiveness hinges on precise design. Only when indices are anchored in clear objectives, transparent methodologies and robust, validated data do they become effective tools for sustainable investing.

Indices as mechanisms for change

Indices are not, in themselves, agents of change. They are the machinery through which sustainability gets operationalised, and they work through two main channels.

First, cost of capital. When large pools of indexed assets consistently favour companies that meet specific sustainability criteria, they change the financing environment in which those companies operate. Inclusion in indices has the potential to sway both capital access and investor perception.

Second, stewardship and engagement. Indices with articulated sustainability objectives provide clarity about the rationale for company inclusion — and by extension, a focused basis for engagement. As investors move into more nuanced domains, from climate resilience to social equity, well-structured indices help anchor dialogues that might otherwise feel diffuse.

In Australia and New Zealand, the stakes are particularly concrete. The region’s markets rely on sectors such as agriculture, resources and infrastructure that are simultaneously economically foundational and environmentally exposed.

Unsurprisingly, capital is moving as investors reassess risk, opportunity and portfolio construction priorities. Responsible investment now represents over a third (41%) of professionally managed assets in Australia, and over half (56%) in New Zealand, according to RIAA’s Responsible Investment Benchmark Report 2024.

The rise in responsible investment heightens the demand for tools that measure sustainability in practical but also comprehensible terms. Thoughtfully constructed indices can serve that function, enabling investors to articulate and act on their views of the economic and environmental realities that shape this region’s market.  

The next material frontier

As investors gain expertise and experience in grappling with these realities, they are uncovering previously underappreciated areas of materiality. Nature and biodiversity, embodied in unique and fragile ecosystems, underpin much of Australia and New Zealand’s economies.

Today, advances in data and modelling allow us to link local ecological dependencies to financial exposures with increasing specificity.

Disclosure frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) are establishing standards for how companies report their ecological dependencies and impacts. Index innovations take this a step further by translating disclosure into quantifiable metrics that investors can use as they construct portfolios and measure exposure to nature-related risks down to the asset level.

What was once aspirational — integrating nature into investment decisions — is becoming operational.

Scaling impact

Sustainable index strategies are continuously evolving, reflecting a constant process of innovation in data, design and objectives.

As strategies become more sophisticated, ensuring the index aligns investor beliefs, regulatory constraints and sustainability objectives becomes more important than ever.

Frameworks such as RIAA’s Responsible Investment Certification Program are welcome initiatives that help strengthen this alignment by bolstering credibility and accountability across the ecosystem.

The payoff to this evolution is that indices are becoming a uniquely powerful tool for investors. To a degree impossible in other strategies, investors can define their own return drivers, risk budget and sustainability measures and objectives in building their strategies with sophisticated index providers.

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<small> Disclaimer: The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA).This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions.