In the years following the financial crisis of 2008, the performance of the financial markets was strongly influenced by the spread of passive investment products (ETFs in the lead) and by management strategies based on the replication of stock market indices. In this way, a self-feeding mechanism was triggered, consolidating over time: the managers were buying, the stock indices (and with them the performance of the products) were growing, the passive management strategies forced to buy again, without distinction.
The result? A distortion of the natural mechanism on which (all) markets are based (price formation based on the comparison between supply and demand), the non-discrimination between good stocks and less good ones and, of course, the dizzying increase in the assets under management due to various phenomena but mainly to central bank policies. BlackRock, the largest management company in the world, today manages nearly seven trillion dollars in 2019. For the most part, invested in passive instruments.
Taking for granted the principle that trees cannot grow to the sky, one wonders what would happen in the event of a downturn. That is, if the passive managers begin to sell the stocks in the portfolio indiscriminately because they must respect the proportions of the reference index. For some time now, operators and observers have been wondering and some of them are even alarmed as it is expected that the automation underlying passive management can amplify and accelerate a decline in the markets. Is there a solution to encourage soft landing? Obvious: make sure that the passive managers are not obliged to sell all the shares representing an index together.
Yeah, but how? The growing (and globally widespread) attention to climate change could defuse the bomb by offering the opportunity (or the excuse?) to introduce in the composition of the indices the distinction between "green" and "less green" stocks (i.e. representative or not of businesses that have a positive impact on climate change). A distinction which, in fact, would translate into the creation of a new market.
In the recent World Economic Forum in Davos, it was found (once again) that the risks of climate change are not unanimously shared, much less repair or preventive policies. If not saving the environment, the "green" turn could allow the investment giants to free themselves from the passive replication of the indices and reducing the risk in the downward phase.