In the U.S. the predominant view on custom/direct indexing is that it serves as a vehicle to tax-loss harvest, but overseas could be shaping the future of this innovative new product. In the U.S. the tax code lends itself to these features, but Euro area tax laws vary so differently, custom indexing is being pitched more as an impact investing tool. This has real use cases specifically for targeting greenwashing. Greenwashers rig the system to benefit from favorable lending policies when they may have no business really being a green energy company. While some amount of impact investors are piggy backing on these good environmental scores to gain return, many new investors like millennials are interested in seeing their dollars actually impact environmental progress. An empowered group impact investors can eliminate ‘greenwashers’ from their custom index, which could lead to fundamental change in custom indexing.

Finsum: While the future of custom indexing products is vast ESG has some of the best potential because investors can call their bluff.