Passive funds don’t always come off well in ESG discussions. Trackers with an ESG remit sometimes nevertheless hold companies in environmentally harmful sectors, while passive providers more broadly stand accused of not engaging with businesses that should embrace better behaviours. That’s something we’ve covered in the past, including Chris Akers’ feature from the end of last year.
If such failings are widely discussed, it’s always interesting to see them quantified in a new way. A paper recently published by Common Wealth, a think tank, does exactly that. The authors Analysis of “The passive revolution” finds that, when it comes to UK-listed companies, passive funds are now “uniquely overrepresented” in their ownership of the oil and gas industry. Passives account for more than 40 per cent of fund ownership in the fossil fuel space (defined as oil, gas and coal extraction and related operations), making it the only major sector where that figure is so high.
As the authors explain, this emphasises the direction of travel from recent years. “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,” they explain. As they put it, this backs the idea that passives could become "holders of last resort" for a very controversial sector.