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Think tank warns fossil fuel ownership makes passive funds ‘holders of last resort’

Research by Common Wealth found that passive funds are increasing their exposure to fossil fuel firms “even as the actively-managed sector has begun to retreat”.

The report, The Passive Revolution, authored by Chris Hayes and senior research fellow Adrienne Buller, identifies a “small cohort of increasingly vast asset management giants”, namely BlackRock, Vanguard and State Street, that has “ridden a wave of enthusiasm for passive investing to positions of dominance” within the UK shareholder structure.

It concludes that passive funds’ growth in the fossil fuel industry, to the point where it is now the only one in which passive funds represent over 40% of all fund ownership, as well as the growth of passive funds across the entire FTSE All Share index over the past decade has outpaced active funds.

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“However, while the combined holdings of both segments have stagnated, there has been a clear compositional shift in this ownership toward passive funds, as the active segment appears to have begun a modest but clear retreat from the fossil fuel sector in the past three years, while the passive segment has continued to expand its stake,” the report states.

The think tank suggests that this “corroborates activists’ concerns that these funds are becoming ‘holders of last resort’ – 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”.

Common Wealth’s latest research also warns that the role of index providers “remains comparatively under-scrutinised and, critically, under-regulated”, despite the fact that three firms “dominate the index business” – MSCI, S&P Dow Jones and FTSE Russell – taking in over three-quarters of all industry revenues.

Within the think tank’s passive cohort, funds with the S&P label accounted for £1.1trn of all fund total net assets at the close of 2021, or 24% of the total, meaning that if the index provider were a fund manager, it would be among the largest in the group.

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In comparison, the research found that BlackRock’s iShares represents approximately £430bn, or just over 9%, of the total assets in the cohort.

“These companies have significant and growing influence over how capital is allocated in the global economy,” the report stated.

Ed Miliband, former leader of the Labour Party and member of parliament for Doncaster North, sits on the board of Common Wealth.

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