Taking Control of Hidden Risks in Passive Sustainable Equity Strategies
As this chart shows, tracking error varies significantly over time in response to the market environment, notably during 2022 and 2023.
For the MSCI World Climate Change Index, the rolling 12-month average tracking error varied between about 100 basis points and 400 basis points over the five-year period. In some cases, we see tracking error increasing for one index while decreasing for another, as in 2023 when the climate change index diverges farther from the parent index while the selection index tracks more closely. Interpreting the causes of these swings is complicated by the intricate and interwoven nature of the sustainability criteria in each methodology. Nevertheless, our analysis makes clear that sustainable passive…
