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Equity markets, benchmark indices, and the transition to a low-carbon economy

Working Paper

Authors: Fabien Hasan    Jakob Thomä    Nick Robins    Stanislas Dupré   

Published By: UNEP Inquiry    2 Degrees Investing Initiative   

Date: Jun 2015

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Equity markets, benchmark indices, and the transition to a low-carbon economy

Equity markets have a significant share in financial markets, with institutional investors and market-capitalization weighted indices playing a substantial role. Today’s landscape of market-capitalization weighted indices favours high-carbon sectors and creates biases against green, low-carbon technologies. As a result, institutional investors have lower exposure to the green economy, which, in the context of the transition to a low-carbon economy, may imply capital misallocation creating financial risk.

The research presented in this report on financial products and tools suggests these products are not fully transparent for institutional and retail investors. Policies can play a key role in increasing transparency in financial markets, notably with regard to the diversification of benchmark indices. Potential sub-optimal diversification delivered by the current landscape of mainstream financial products may be a challenge to questions around fiduciary duty. Diversification of indices plays a key role in EC regulation around capital reserve requirements. Finally, more active policymakers may seek to explore incentives around more climate-friendly financial products.

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