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.