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There has been a growing perception in recent times that index investors cannot apply responsible investment principles to their portfolio holdings. This thinking is based on a fundamentally flawed argument. On the contrary, given that an index fund does not have the option of selling out of a stock, index investors have even more incentive to ensure that the stocks they are mandated to hold continue to offer sustainable returns through the consideration of environmental, social and governance (ESG) factors. Traditional indices historically had limited scope to incorporate ESG factors, which resulted in exposure to companies with controversies or poor ESG ratings. However, innovation in index investing in recent years has broadened the capabilities of index-tracking investment managers in this respect, allowing them to incorporate ESG factors in their investment process. The market is now experiencing an increase in low-cost indices that offer ESG-led mandates and champion responsib...

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