FOR IMMEDIATE RELEASE
October 13, 2020
Washington, D.C. — Today, Business Forward Foundation released a report on the influence index funds have on fossil fuels companies and climate risk, in general. The Downside of Index Funds explains how buying the market “as it is” props up coal, oil, and gas companies active managers have been avoiding.
“For years, Wall Street’s biggest asset managers have advised their high net worth clients to get out of fossil fuels, and clients who listened avoided heavy losses in coal, oil, and gas,” said Jim Doyle, president of Business Forward. “But ‘passive’ index funds keep buying the market as it is, which means losses in coal, oil, and gas are carried disproportionately by small investors.”
After years of losses, fossil fuel companies rely increasingly on index fund investors. A recent report from The Sunrise Project found the ‘thermal coal intensity’ of passively managed funds at BlackRock was more than twice as high as its actively managed funds.
“This difference has systematic implications: fossil fuel companies raise more capital than they otherwise would, and they use about one-third of it to bring new fields online, which accelerates the climate crisis,” explained Doyle. “Index funds offer small investors lower fees, lower risk, and more diversification, but we need ESG reforms to fix this market failure: Small investors — and our planet — deserve it.”
1. The battle for global energy dominance is over: renewable energy won.
2. High net worth investors, following Wall Street’s advice, are fleeing fossil fuel companies. The sector, which underperformed for a decade, is collapsing. And BlackRock, the world’s largest asset manager, is instituting market-shaping reforms to integrate ESG across its business.
3. But if you are an index fund investor, you keep buying fossil fuel equity and debt. You’re even buying coal stocks, which BlackRock, the world’s largest money manager, declared “dead” three years ago.
4. Index funds are “passive,” which means they buy the market as it is, no matter what the experts say about where the market’s heading. Economists call this the “index effect,” and it is propping up coal companies at the expense of renewable energy and other investments.
5. This would be bad news if you were the exception, but you are the rule. More than half of the U.S.’s assets are in passive funds, and the asset managers investing those funds will not switch to sustainable alternatives… unless their customers make them.
6. This has systemic implications. Artificially high valuations for coal, oil, and gas companies help bring new fields online, accelerating the climate crisis. And the consolidation of fossil fuel risk in passive funds means that small investors and retirees bear most of the cost as fossil fuel companies decline.
7. Asset managers argue it’s too difficult to make exceptions for coal and other fossil fuel companies, but the solutions are pretty straightforward: 1) require investors in our biggest funds to opt-in to fossil fuels, not opt-out; and, 2) institute clear, reliable standards for “green” investments.
ABOUT BUSINESS FORWARD FOUNDATION
The Business Forward Foundation is an independent research and education organization that takes a business-minded look at policy issues affecting America’s economic competitiveness. Our work combines insights and advice from business leaders across the country with rigorous policy analysis. Through white papers, issue briefs, conference calls, and other events, we educate policy makers and the public about climate change, immigration reform, infrastructure investment, the future of work, and other critical issues.