The recent, blustery movements in oil prices in response to the United States’ war with Iran illustrate the financial market’s agile ability to reprice for a predicted future market. Yet, a decade after 195 nations adopted the Paris Agreement to transition away from fossil fuels, the market has made no changes in response. Part of this may be due to investors’ expectations of a delayed rollout, but the inertia is also due to flawed market design in which laws of fiduciary duty prevent funds from providing investors with vehicles that can make true bets on how soon the world will retire fossil fuels, writes Michael A. Santoro.
In April, Brent crude rose more than 50% above where it started the year, ricocheting from around $90 to nearly $120, then to $105 in a matter of weeks as expectations about the security of the Strait of Hormuz—through which roughly a fifth of the world’s oil trade passes—moved with the war. The United States’ war with Iran reminded everyone of something that should not have needed reminding: capital markets can reprice with stunning speed when they decide a future economy different from the current one is foreseeable. So why, ten years after enactment of the Paris Agreement to limit climate change to 1.5 degrees Celsius, will the same markets not reprice for the energy transition that will entail the retirement of fossil fuels? The answer is neither scientific nor economic but legal. The consensus interpretation of fiduciary duty and safeguards of disclosure, diversification, and benchmarking mean that even fund vehicles that advertise themselves as tailored for the imminent transition to zero carbon emissions hold companies that make bets on a prolonged transition. There are no real choices for investors who believe the transition will arrive sooner. Worse, the very investments meant to accelerate the transition, by flowing to vehicles that include companies positioned for delay, end up prolonging it.
Betting on Paris
Every dollar invested in global capital markets today is implicitly placing a wager on when the energy transition will arrive. There are, in principle, two coherent views available. Bet A says the transition will be slow, deferrable, and gradual: carbon-intensive assets will keep generating returns, and any repricing, when it finally comes, will be orderly. Bet B says constraints on fossil fuels posed by the transition will have material effects sooner than expected by most investors, and assets misaligned with those constraints will be marked down, possibly all at once.
Reasonable people, looking at lagging implementation by governments and firms, missed pledges, and political backlash, can defend Bet A. Reasonable people, looking at the European Union’s carbon border adjustment; the proliferating climate disclosure regimes from the Securities and Exchange Commission (where the status is uncertain in the current administration) to the International Sustainability Standards Board; the network of central banks running Paris-aligned supervisory scenarios; the wave of transition-related litigation against board directors and trustees; and the ground-level economics of solar and storage, can defend Bet B.
The structural problem is not which of them is right, and I won’t hazard here a guess for which timeline is correct. The structural problem is that today’s investor cannot place either bet cleanly. There is no instrument (meaning an actual fund or vehicle, not a list of individual stocks an investor would have to assemble alone) through which an investor who genuinely believes the transition is 15 years off can take that view in a focused way. Similarly, there is no instrument through which one who believes it is five years off can take that view either. The question of when is the very question the market exists to answer, and at present, the architecture of investment does not let it.
Bet A is not, in this sense, a deliberate consensus forecast of capital markets. It is the residual position investors end up with when they follow every existing rule of fiduciary practice. It is the bet you make by default—even if your actual view is something else.
The strangeness of this becomes clear once you look at the products explicitly marketed as the alternative: the products advertised as Bet B. With my undergraduate research assistant Mason Harrington, I developed a classification that asks whether a holding’s revenues actually scale with accelerated decarbonization. Yes means revenues scale directly with transition speed. Partial means the firm benefits from transition but is not exclusively dependent on it. No means the business is largely independent of transition timing. A separate category captures firms whose revenues would decline with accelerated transition — the carbon-intensive incumbents whose assets are most exposed to repricing. The framework shifts the analytical focus from what firms say or disclose to how they make money.
Take the iShares Global Clean Energy ETF (ICLN), one of the largest “clean energy” funds in the world. Its largest holding, at 11.4%, is Bloom Energy, whose solid-oxide fuel cells generate lower-emission electricity but can run on natural gas as well as hydrogen—its revenues do not depend on accelerated decarbonization in the way a developer of pure renewables would. Nextracker (8.6%) and First Solar (6.1%) are direct Paris bets: their revenues scale with renewable buildout. But the fund’s fourth-largest position, at 5.8%, is Iberdrola, a global utility whose renewables business sits inside a much larger portfolio of legacy generation, regulated networks, and other revenue streams largely insulated from transition pace. Its fifth is China Yangtze Power, a hydroelectric operator whose cash flows depend on existing dams and Chinese power demand far more than on the speed of any global energy transition. The pattern repeats in similar funds, including First Trust NASDAQ Clean Edge Green Energy Index (QCLN) and Invesco WilderHill Clean Energy ETF (PBW).
These products tilt toward transition beneficiaries, but they do not concentrate the bet, and the reasons are structural. Disclosure rules from the SEC require funds to tell investors about climate risk in its portfolio but do not require it to act on that risk: the ICLN fund can hold Iberdrola, name the exposure in its filings, and meet its legal obligations in full—all without changing a single position. Diversification rules require exposure across sectors and geographies; a fund that concentrated in 25 pure renewables developers would fail any standard prudence test even if its manager believed the transition would arrive in five years. Benchmarking anchors the fund to an index—for ICLN, the S&P Global Clean Energy Index—that in the case of ICLN already contains Iberdrolas. Deviating from the benchmark to concentrate on Bet B exposes the manager to tracking-error risk and the underperformance lawsuits that follow. The result is a fund that markets itself as Bet B and structurally cannot be one. A real Bet B fund would look different: It would hold roughly 25 to 40 companies whose revenues scale directly with renewable buildout, it would not benchmark to an index that would pull it back toward the broader market, and it would not follow a diversification mandate that spreads exposure across sectors neutral on transition timing.
Call this the illusion of alignment. The product label suggests one view about transition timing; the portfolio inside expresses something else. The consequence is not that investors have been deceived. The consequence is that even the products marketed to investors who want to express a view about transition speed do not, in fact, let them.
The limits of fiduciary duty
In theory, disclosure, diversification, and benchmarking are sound practices. They are designed to protect investors. However, the energy transition and its uncertainty show the limits of contemporary legal interpretations of fiduciary duty. It shows that the emphasis is on procedure rather than substance: investors who believe the energy transition will occur sooner rather than later are precluded from accessing genuine investment vehicles. A trustee or fund manager satisfies the duty of prudence by following accepted process. Following the process shields managers from liability. Designing vehicles that enable substantive bets on an imminent transition exposes them to liability.
Recent regulatory history reinforces the lesson. The U.S. Department of Labor has reversed itself twice in five years on whether fiduciaries operating under the Employee Retirement Income Security Act may consider climate risk in retirement-plan investments—a politicized sequence that nevertheless signals to fund managers, regardless of what they personally believe about transition timing, that taking that belief seriously in their portfolio construction is contestable and may invite litigation.
The Net Zero Asset Managers Initiative (NZAMI), which briefly represented over $50 trillion in assets under management, hemorrhaged its largest members in 2024 and effectively suspended operations in 2025. It relaunched in February 2026, but only after dropping its 2050 net-zero target and replacing it with vaguer language calling for “near-term climate targets consistent with the global goal of net zero greenhouse gas emissions.” NZAMI illustrates the same architectural point at the level of voluntary commitments: pledges that are not built into actual fiduciary obligations cannot survive political pressure, because no manager faces any cost from walking away.
What does a Bet B fund look like?
To provide investors who hold a view about transition timing—any view—with an instrument to act on it requires contracts that oblige the fund to build transition timing into their prospectus rather than treat it as a soft, non-binding input. These vehicles would do three things current funds don’t. First, they would value their holdings against specific transition timelines, not market-average assumptions. Second, they would adjust their pricing automatically when emissions or alignment targets are missed. And lastly, they would have rules in their charter that force a shift in holdings if defined targets are hit or missed—instead of leaving those decisions to manager discretion.
Functionally similar instruments exist in adjacent corners of finance. Catastrophe bonds make timing explicit by tying coupon and principal to the occurrence of a defined event within a defined window. Sustainability-linked loans adjust pricing automatically when borrowers miss disclosed performance targets. Neither of these instruments required rewriting fiduciary law. They simply used contracts to make explicit what the surrounding system permitted to remain implicit. A transition-contingent vehicle would do the same thing for the timing of decarbonization. It would not require investors to share a view about when transition arrives. It would require only that those who do hold a view be able to act on it.
The point is not that every investor must take Bet B. Reasonable people disagree about timing, and the market is the right place to resolve that disagreement—but only if the disagreement can be expressed in prices. At present, it cannot. The cost is not paid by individual holders, who can rotate out of any liquid asset at will. It is paid in the real economy, where today’s cost of capital decides which power plants get built, which pipelines get approved, which alternatives get starved. Equity can be sold; capital misallocated into infrastructure built on faulty market information produces a welfare loss that can never be recaptured.
Climate finance is usually framed as a problem of mobilizing enough capital. That framing misses the structural issue. The capital exists. It is being allocated, every day, on the basis of an assumption about time that no investor was asked to weigh in on. Markets did not need new legislation to reprice for Hormuz. They needed only an architecture that permitted probabilistic views about a foreseeable future state to be expressed in prices. Paris has been foreseeable, in the same probabilistic sense, for a decade. Until the architecture of investment lets investors price what they actually believe, capital will keep building the infrastructure of a future no one consciously chose.
The Paris Agreement is not waiting for governments to ratify it. It is waiting for markets to price it.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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