Passive with purpose: Advancing responsible investment through standards for index strategies

Index investing has transformed capital markets. Trillions now track indices that shape investors’ exposures across sectors, geographies, and sustainability objectives. Yet as investors increasingly use indices to express responsible-investment goals, it is clear that indices are not neutral. Every rule—what’s in, what’s out, how companies are weighted—embeds a view of how investors wish to allocate exposures within equity markets.

The early generations of indices were market capitalised and aimed simply to represent the market. The next introduced factor exposures—systematic tilts toward rewarded drivers of return like value, size, and profitability. The current generation brings sustainability and climate considerations to the fore. Across these evolutions, the index has shifted from mirror to mechanism—no longer reflecting markets, but actively shaping them.

How to ensure index strategies drive sustainability outcomes

Responsible investing through indices starts with design discipline. The first rule is focus. An index that tries to address too many issues risks becoming confused in purpose—much like blending too many strong flavours in one dish. Clarity of intent ensures clarity of outcome. A credible sustainability index should articulate precisely which goals it seeks to advance, how they are measured, and allow for a clear investment and sustainability attribution.

Not all indices are created equal. Every index is a set of rules—but those rules can either illuminate or obscure how sustainability is implemented. For instance, a methodology relying heavily on opaque ESG ratings may give the illusion of transparency while embedding subjective judgments deep within the scoring process. By contrast, rules grounded in robust, observable, and widely reported data—such as greenhouse gas emissions—allow investors to understand, test, and replicate the outcomes.

Data is critical—but only when used well. In an age where data and artificial intelligence dominate headlines and marketing, it’s easy to assume that more data automatically means better insight. For index design, what matters is not the scale of information but its robustness, transparency, and how effectively it serves the index’s stated objectives.

That is the essence of purposeful design: being explicit about objectives, transparent about data, and disciplined about trade-offs. This discipline, ensuring that sustainability objectives remain evidence-based rather than opinion-driven, and that the index serves as a reliable instrument—not a black box—for responsible investment decisions.

Reflecting diverse values with common standards

Responsible investment through index strategies hinges on credibility. As sustainable investing has become mainstream, so too has the risk of over-promising and under-delivering. That’s why initiatives such as RIAA’s Index Certification are so important: they move the conversation from marketing narratives to measurable methodologies. RIAA’s Index Certification is the world’s first program to recognise and verify indices that demonstrate strong alignment with responsible investment practices. It provides assurance that an index’s responsible investment claims are independently validated by a trusted third party, that ESG factors are appropriately integrated into its methodology, that data inputs are well-governed, and that constituents genuinely align with the stated responsible investment objectives or tilts.

At the same time, certification is not intended to replace fiduciary judgement—it supports it. Investors still have a duty to evaluate whether a certified index aligns with their portfolio objectives, risk tolerance, and sustainability priorities. Certification assesses the index methodology, confirming that an index is transparent, independently verified, and true to its responsible investment claims. It gives fiduciaries a stronger foundation for decision-making—clarifying how sustainability objectives are implemented, rather than prescribing what those objectives should be.

Putting purpose into practice

Index strategies are not always the first place investors look when pursuing sustainability objectives. Yet with thoughtful design and clear standards, they can provide a disciplined, transparent, and scalable way to express those objectives. Certification strengthens this foundation by setting expectations for how responsible investment principles are implemented and disclosed.

As index investing continues to evolve, the focus should remain on evidence—how objectives are defined, how data is used, and how outcomes are measured. Standards such as RIAA’s Index Certification help bring that evidence to the forefront.

At the RIAA Conference Aotearoa NZ in September, I joined a panel of experts to further explore this topic. In the session, we discussed how index-based strategies can meet responsible investment aims and align with RIAA's Responsible Investment Certification Standard, increasing investor confidence through external validation.

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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.