Aligning to A Net Zero Future

For decades, passive investing was defined by neutrality—index funds simply tracked the market, reflecting the economy as it was rather than shaping what it could become. But the rise of climate transition and Paris-aligned benchmarks marks a watershed departure from this model. Unlike traditional indices, these benchmarks do not just mirror the market; they actively tilt to reshape it, systematically reducing exposure to high-carbon laggards while favoring firms aligned with a net-zero trajectory. Unless the entire economy decarbonizes in lockstep, these indices will inherently diverge from the broader market, embedding climate transition into the structure of financial markets at potentially exponential levels of diverging tracking error and active share.

This is a fundamental recalibration of capital allocation. Climate-aligned benchmarks introduce a financial signal that rewards transition preparedness and penalizes inertia, shifting the cost of capital for entire industries. As institutional investors adopt these indices, they are effectively embedding a divergent theory of change, challenging the of very notion passive investing typically regarded as a neutral reflection of market consensus. But in this new paradigm, indexing is no longer just a mirror—it is a mechanism shaping financial incentives and corporate strategy, actively driving market evolution rather than merely tracking it.

What we are witnessing is not just an evolution in sustainable investing but a redefinition of how markets function. The rise of climate-aligned passive strategies signals the breakdown of business-as-usual finance and the recognition that systemic risks—whether climate, technological, or geopolitical—require systemic solutions. As these indexes gain traction, they could shape investment flows, regulatory responses, and corporate decision-making in ways that extend far beyond climate. The question is no longer whether finance will drive the transition—but at what pace.