Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change

22 Pages Posted: 19 Feb 2019 Last revised: 11 Mar 2019

See all articles by Patrick Jahnke

Patrick Jahnke

University of Edinburgh - School of Social and Political Science

Date Written: March 9, 2019

Abstract

This paper demonstrates that index funds and index providers have agency and thus responsibility for the companies contained within their financial products. As a growing number of institutional asset owners are divesting from coal assets, index funds are becoming the holders of last resort. The common wisdom has it that index funds cannot sell out of individual stock holdings. They have a “voice” but no ability to “exit.” This paper investigates the relationship between index providers and index funds and finds the traditional understanding that index investors cannot sell to be false. Instead an increasing prevalence of index investors switching both indices and index providers is noted. Such changes provide investors with the opportunity to exclude specific stocks. This paper therefore suggests a number of solutions for index funds to reduce the carbon intensity of their funds, such as switching the indices their funds employ, discontinuing niche ETFs that are carbon intensive, reducing fees on low-carbon investments, or making use of their financial clout as index providers’ biggest customers to advocate for selective index amendments. Adding the threat of exit will increase the power of voice. Doing so will ensure, that rather than functioning as insulators from sustainability pressures, they act as conductors.

Keywords: Index Providers; Index Funds; ETFs; Corporate Governance; Divestment; Sustainability

JEL Classification: A13, G3, L2

Suggested Citation

Jahnke, Patrick, Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change (March 9, 2019). Available at SSRN: https://ssrn.com/abstract=3314906 or http://dx.doi.org/10.2139/ssrn.3314906

Patrick Jahnke (Contact Author)

University of Edinburgh - School of Social and Political Science ( email )

Edinburgh
United Kingdom

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