Fossil-free funds UK: what does fossil-free investing mean?
Fossil-free funds sound simple: avoid fossil fuels. In practice, the definition can vary sharply. Some funds exclude coal miners and oil producers. Others exclude fossil fuel reserves, power generation, oilfield services, fossil fuel finance or companies expanding production. The detail is where mos
Financial information only
This article is for informational and educational purposes only. It is not financial advice, investment advice, a recommendation, or a personal financial promotion. Funds can fall in value and sustainability exclusions can change portfolio risk. Speak to an FCA-authorised adviser before making investment decisions.
Fossil-free funds sound simple: avoid fossil fuels. In practice, the definition can vary sharply. Some funds exclude coal miners and oil producers. Others exclude fossil fuel reserves, power generation, oilfield services, fossil fuel finance or companies expanding production. The detail is where most of the risk sits.
Before choosing a fossil-free fund, it also helps to understand fossil-free fund approaches, fund greenwashing, FCA SDR labels and climate risk in portfolios.
The short answer
A fossil-free fund usually aims to avoid companies involved in fossil fuel extraction, production or reserves. But "fossil-free" is not a single legal definition. The fund methodology decides what is excluded, what thresholds apply, and whether indirect exposure is captured.
Before relying on the label, read the exclusions policy, holdings, benchmark, stewardship policy and sustainability disclosures. A fund can be fossil-free and still hold high-emitting industrial companies, banks that finance fossil fuels, utilities in transition, or companies with climate controversies.
Fossil-free vs low-carbon vs ESG
| Label | What it usually means | Main limitation |
|---|---|---|
| Fossil-free | Excludes specified fossil fuel activities. | Scope and thresholds vary. |
| Low-carbon | Tilts toward lower carbon intensity than a benchmark. | May still hold fossil fuel companies if they score better than peers. |
| Paris-aligned | Uses climate benchmark or alignment methodology. | Depends heavily on assumptions and data quality. |
| ESG | Integrates environmental, social and governance criteria. | Can hold fossil fuel exposure if ESG score or index rules allow it. |
What should a fossil-free policy cover?
A robust fossil-free methodology should explain whether it excludes:
- Thermal coal mining.
- Coal-fired power generation.
- Oil and gas exploration and production.
- Oil sands, Arctic drilling or unconventional extraction.
- Companies with fossil fuel reserves.
- Midstream infrastructure such as pipelines.
- Oilfield services and equipment.
- Companies expanding fossil fuel production capacity.
- Banks or insurers with material fossil fuel financing exposure.
Many funds exclude the first few categories but not all of them. That may be acceptable if clearly disclosed, but it should not be marketed as more comprehensive than it is.
Thresholds matter
Some funds exclude any company with fossil fuel revenue. Others allow exposure below a threshold, such as a maximum percentage of revenue from coal, oil or gas. Thresholds may also differ by activity: thermal coal might have a stricter limit than gas power generation.
Investors should ask whether the threshold is based on revenue, reserves, generation mix, capital expenditure or another metric. A company can have low current fossil fuel revenue but still be planning high future fossil fuel investment.
Why fossil-free funds can still hold climate risk
Excluding fossil fuel producers does not remove all climate risk. A fossil-free fund may still hold airlines, cement producers, carmakers, steel companies, logistics firms, banks, insurers or technology companies with high energy use. These companies may face carbon pricing, supply-chain risk, physical climate risk or transition policy risk.
That does not make the fund bad. It means the label should be read as an exclusion policy, not a complete climate-risk assessment.
SDR labels and fossil-free funds
An FCA sustainability label can help, but a fossil-free fund does not automatically have one. A fund could use exclusions without meeting the criteria for a Sustainability Focus, Improvers, Impact or Mixed Goals label. Conversely, a labelled fund may not be fully fossil-free if its objective involves transition or improvement.
The anti-greenwashing rule means sustainability claims by FCA-authorised firms should be fair, clear and not misleading. For fossil-free funds, the risk is obvious: the name can imply a stricter exclusion than the methodology supports.
Due diligence checklist
- Read the exclusion policy line by line.
- Check whether exclusions cover reserves, revenue, generation, financing and expansion plans.
- Review top holdings and any controversial holdings list.
- Compare the fund against its benchmark.
- Check whether the fund uses an FCA SDR label.
- Look for stewardship and escalation policies.
- Compare fees with broad ESG and non-ESG alternatives.
- Check whether the fund is diversified or concentrated in particular sectors.
Where fossil-free funds fit
Fossil-free funds may suit investors who want clearer exclusions than broad ESG integration. They may be less suitable for investors who want exposure to transition companies, engagement strategies, or a benchmark-like portfolio with minimal tracking difference. This is an investment design question, not a moral shortcut.
Bottom line
Fossil-free is only useful if you know what the fund excludes. The strongest funds define fossil fuel exposure clearly, publish holdings, explain thresholds, disclose stewardship and avoid overstating what the exclusion achieves.
FAQ
Can a fossil-free fund still hold banks?
Yes. Some fossil-free policies focus on fossil fuel producers and reserves, but do not exclude banks or insurers that finance fossil fuel companies. Investors should check indirect exposure and financing criteria.
Is fossil-free the same as low-carbon?
No. Fossil-free usually refers to exclusions. Low-carbon usually refers to portfolio emissions intensity or benchmark tilts. A low-carbon fund may still hold fossil fuel companies under some methodologies.
Does fossil-free mean diversified?
Not necessarily. Some fossil-free funds are broad and diversified. Others are more concentrated. Investors should check sector exposure, region exposure, benchmark and fees.