Investors with an environmental, social and governance focus are increasingly leaning toward passive portfolios, which may seem to offer the simplicity they crave in a complex market landscape. But the path to passive is fraught with risks, particularly when it comes to sustainable strategies.

Passive portfolios continue to gain traction. In 2023, for the first time, equity assets managed by passive funds overtook actively managed assets, according to Morningstar data. The trend has not been as acute for sustainable portfolios. Yet passive sustainable equity funds globally attracted $52.6bn of inflows in 2023, while active sustainable funds bled nearly $16.7bn, according to Morningstar.

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