Tracker funds are financing activities that damage society and the planet because they pump hundreds of millions of pounds into fossil fuel and tobacco companies, warn responsible investment experts at Castlefield Advisory Partners.
On the occasion of Good Money Week (30 October-4 November) the advisory company commissioned a report which shows that eight of the UK's nine biggest tracker funds - which together have £16.7 billion under management - invest £1.2 billion, or 9 per cent of their combined value, in fossil fuels.
In addition to causing environmental damage, these funds leave investors exposed to climate risk. Bank of England governor Mark Carney has previously warned that action to limit climate change and the transition to a low carbon economy will leave fossil fuel investors facing huge losses.
That is because 'stranded' assets such as oil, gas and coal "will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics", Carney said.
"The exposure of UK investors, including insurance companies, to these shifts is potentially huge. Some 19 per cent of FTSE 100 companies are in natural resource and extraction sectors; and a further 11 per cent by value are in power utilities, chemicals, construction and industrial goods sectors.
"Globally, these two tiers of companies between them account for around one third of equity and fixed income assets."
Since 2007, 'tracker' or 'passive' funds have grown four times faster than actively managed funds, with $6 trillion (£4.9 trillion) invested in them worldwide, and they are the default investment option for many pension schemes.
John Ditchfield, partner at Castlefield, says: "Trackers might appear to be a cheap investment solution, but we are concerned that people might not be fully aware that they are financing damaging social and environmental activities and putting investors' money at risk."
Tracker funds are particularly popular with millennial investors (those aged 18-32), who use passive investments for over 90 per cent of the equity portfolio, compared with the over 40s who only invest 40 per cent of their equity passively.
Opinium Research polled 2003 people in the UK on behalf of Triodos Bank and found that 63 per cent of millennial investors think people should invest their money where it can support companies that make a positive contribution to society and the environment.
Simon Holman, partner at Castlefield, says: "This is a key issue to put under the spotlight. We know that millennials are the group most keen on investing in companies with positive environmental and social outcomes, but are also one of the groups with the fewest available assets to invest for their future.
"Investing in such damaging industries isn't what many of the younger generation want to do with their precious funds and the finance industries need to offer better solutions.
"These funds might be 'low-cost' to buy but they are already high-cost in terms of their environmental and social impacts, let alone the possible future financial costs from being invested in the areas."