Investigating the role of passive funds in carbon-intensive capital markets: Evidence from US bonds

Capital flows in primary markets are key to the low-carbon transition, as capital raised can finance low or highcarbon assets. Yet, fund-level climate-related disclosures have focused on portfolio holdings, reducing the ability of investors to evaluate the impact of capital flows. In particular, as passive funds grow, there is a risk that capital is channelled into carbon-intensive assets through primary markets. To track carbon-intensive portfolio holdings and primary market transactions, and the role of passive funds within them, we construct a dataset of daily holdings for passive U.S. corporate bond exchange-traded funds (ETFs) from 2016 to 2021. We find that the carbon exposure and carbon intensity of ETF primary market transactions are associated with existing ETF portfolio holdings. We also find that the share of secondary market holdings and primary market transactions accounted for by passive ETFs is higher for fossil fuel bonds, and increases with bond-level carbon intensity. These findings indicate that the continued growth in passive funds could support carbon-intensive capital flows.