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 Equity Markets, Benchmark Indices, and the Transition to a Low-Carbon Economy 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.