2016 ET CARBON RANKINGS REPORT
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10<br />
ENGAGED INDEXES, <strong>CARBON</strong> RISK AND<br />
PERFORMANCE: INDEX INVESTING AND ITS<br />
IMPLICATIONS FOR REDUCING <strong>CARBON</strong> RISK<br />
Index investing strategies – also referred to<br />
as passive investing – are rapidly growing as<br />
a proportion of the market. In <strong>2016</strong>, passive<br />
equity vehicles accounted for over 40% of<br />
total US equity fund assets, up from 18.8% a<br />
decade ago, according to Morningstar. 17 This<br />
is representative of the global trend, with over<br />
$4 trillion in savings now in index funds.<br />
The reason for this shift in assets is clear.<br />
Investors are disillusioned with active<br />
investing strategies that charge higher fees<br />
and typically fail to perform better than more<br />
cost-effective index-based counterparts. 18<br />
In a low-return environment where fees<br />
and performance come under particularly<br />
harsh scrutiny, it is hard to see an end to this<br />
accelerating shift towards passive investing,<br />
particularly as technology continues to drive<br />
down costs. This has important ramifications<br />
for how financial flows can be guided to<br />
address the financial risks and opportunities<br />
linked to climate change.<br />
Firstly, stock market indexes, acting as<br />
benchmarks for fund performance or as the<br />
basis of investment strategies, will occupy an<br />
increasingly important role in the allocation<br />
of capital across the economy. However, pure<br />
index investing strategies reward companies<br />
solely on the basis of current financial<br />
performance and fail to anticipate future risks<br />
and opportunities such as those created by<br />
the low-carbon transition.<br />
Secondly, the role of investor engagement on<br />
climate change with investee companies will<br />
become an increasingly important function<br />
for index houses and passive investment<br />
funds. Blackrock, Vanguard and other asset<br />
management giants have been openly<br />
criticised for their failure to use their position<br />
of significant influence to vote on shareholder<br />
resolutions relating to climate change. 19<br />
<strong>ET</strong> INDEX RESEARCH<br />
<strong>2016</strong> <strong>CARBON</strong> <strong>RANKINGS</strong> <strong>REPORT</strong>