Investing in a passive index may be an optimal route for those who do not wish to spend time and energy conducting due diligence on individual stocks (active investing). Having invested in an index, you can worry less about price swings or firm-specific events, hoping that with time your patience shall bear fruit and let you retire earlier than otherwise. As a passive investor, I never questioned the inclusion criteria behind some of the world’s most renowned stock indices. Until recently.

Earlier this week, I came across a report from a UK-based think-tank advising that one of the prominent market indices includes at least 13 companies, which are involved in alleged human rights violations. As a result of the indices inclusion criteria, some of the world’s leading asset managers (BlackRock, Deutsche, UBS, etc), have been passively investing in these companies.

On the legislation front, all kosher. The US legislators do not allow conducting import business with some of those 13 companies (UFLPA), but not a single one is subject to the investment ban (EO 14032). As such, you can invest in all 13 companies regardless of their alleged involvement in human rights violations. However, most of those fund managers signed the UN PRI, hence the funds’ relevant stakeholders may start questioning the fund managers’ adherence to those principles in practice.

In summary, the report raises some inconvenient questions and makes me wonder on the indices’ inclusion criteria beyond the portfolio companies’ “accessibility and investability”.

A little about myself. I am a young professional based out of Hong Kong. Am currently working as a solution consultant in software sales, and would like to share my observations on the latest from the world of risk management. May drift to an occasional review of a book or two, but let’s see. Thanks for reading, everyone!