We examine how passive ownership shapes firms’ environmental performance. Exploiting the staggered creation of 55 equity indexes across 30 countries, we use index inclusion as an exogenous shock to benchmark-tracking ownership. Following inclusion, environmental scores increase and carbon emissions decline, especially among carbon-intensive firms. We identify a demand-elasticity channel: greater benchmark-tracking ownership dampens stock-price reactions to earnings announcements and weakens earnings-based performance pressure. Consistent with this mechanism, capital expenditures and green patenting increase while profitability declines. Our results show that passive investors can promote decarbonization precisely by doing less—trading less on firm-specific performance.
