What drives sustainable indices? A framework for analyzing the sustainable index landscape

This article presents an encompassing four-step customizable framework for analyzing the heterogeneous sustainable index landscape. Compared to previous studies, we present means and methods to move the measurement and impact of sustainability performance in the center of attention and emphasize the often neglected aim of sustainable indices: incorporating sustainability into investment tools. Besides traditional comparisons of return and risk indicators (step one), we analyze the sustainability profile of sustainable indices while actively managing the presence of ESG rating disagreement (step two). For the determination of index-specific return and risk sources, we integrate sustainability factors in factor analyses and risk decomposition approaches (step three). A performance attribution analysis based on sustainability classes increases the transparency on the composition strategies of sustainable indices (step four). Our framework facilitates the analyses of sustainable investment tools and thus supports investors in making more meaningful and forward-looking investment decisions in line with their sustainability-related preferences.