As fossil fuel ownership grows, passive funds may become "holders of last resort."

Given their growing ownership in the fossil fuel sector, the think tank Common Wealth has warned that passive funds may become "holders of last resort" in carbon intensive sectors.

As active funds have begun to reduce their investments in the fossil fuel sector, defined as oil, gas, coal extraction, and related operations, according to Common Wealth's latest report, The Passive Revolution, passive funds now account for over 40% of all fund ownership in the sector.

The findings raise concerns that the trend could stymie the UK's climate transition, as "less scrupulous" investors take their place as active investors divest from fossil fuel-related companies.

Adrienne Buller and Chris Hayes, the report's authors, said the findings back up activist claims that passive funds are "extending the lives of fossil fuel firms by helping sustain a higher share price and lower cost of capital despite active market moves out of the sector."

Private equity firms, for example, may have weaker incentives for responsible stewardship and decarbonization.

Since 2010, the overall gap between passive fund strategies and traditional active management strategies has been rapidly closing, according to Common Wealth.

According to research, active and passive fund ownership is convergent across industries, as passive fund growth outpaces the active industry.

The report also stated that, despite having significant influence over where capital is allocated in the global economy, index providers are "comparatively under-scrutinised and, critically, under-regulated."

Only three index companies – MSCI, S&P Dow Jones, and FTSE Russell – dominate the index business, accounting for more than three-quarters of total revenue, according to the think tank.

"Policymakers urgently need to turn their attention to how we can create a financial system that delivers benefits to people beyond the narrow sliver of those with financial wealth, and which can escape the logic of both ecological and financial extraction that has characterised corporate governance until now," the report stated.

By fLEXI tEAM