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Going Fossil Free Is More Complex Than Most Investors Think


By Maximilian Horster  |  July 7, 2021

Let’s start with a little quiz. Say you are building a concentrated portfolio of car manufacturer Toyota, trading house Mitsubishi, beverage firm Coca-Cola Amatil, and financial firm Berkshire Hathaway. Which of those four firms owns oil, coal, or gas reserves?

Around 2010, the divestment movement in U.S. university endowments helped put climate change on investors’ agendas. The call to no longer invest in climate-harming oil, coal, and gas found tremendous support worldwide and by 2020, around 2,000 institutions and 60,000 individuals, representing $14 trillion assets worldwide, have begun or committed to divest from fossil fuels.

On the surface, going fossil free seems to be straightforward; exclude all energy and extractive companies from your portfolio and you are done.

Well, it is not that easy. The responsible investing industry can tell many stories of investors who first proudly claimed fossil-free portfolios by avoiding relevant sectors, and then had to wake up to uncomfortable headlines about unwanted oil, coal, or gas skeletons in the closet.

The reason is that there are many companies that own oil, coal, and gas reserves without being categorized as Energy, Materials, or Utility companies.

Fossil Reserve Owning Companies in Non-Obvious Sectors, Anybody?

Which of the four companies in the introductory paragraph own fossil reserves? You might have guessed it: all four of them. As a matter of fact, ISS ESG collects data on over 100 companies that fall into the category of “unexpected fossil reserve owners.” These unexpected fossil reserve owners can be divided into three major groups:

  1. Conglomerates with diversified businesses. This includes for example many Japanese companies that have diversified into fossil fuel extraction/reserves to secure raw materials for their industrial businesses, such as Mitsubishi Corp., ITOCHU Corp., Mitsui & Co. Ltd., Marubeni Corp., Sojitz Corp., and Sumitomo Corp.
  2. Holding companies involved through subsidiaries/associates. This includes some Indonesian companies, such as Jardine Matheson Holdings Ltd., PT Astra International Tbk, and PT United Tractors Tbk (operating subsidiary that owns coal reserves).
  3. Outliers. This includes companies whose ties to fossil fuels are completely unrelated to its other business operations, such as Coca-Cola Amatil, Toyota Motor, and Berkshire Hathaway.

Fossil Reserve Owning Companies in Non-Obvious Sectors


No. of Companies





Capital Markets




Construction & Engineering


Construction Materials




Diversified Financial Services


Electrical Equipment


Energy Equipment & Services


Food & Staples Retailing


Gas Utilities


Hotels, Restaurants, & Leisure


Independent Power & Renewable Electricity Producers


Industrial Conglomerates




IT Services










Real Estate Management & Development


Trading Companies & Distributors


Transportation Infrastructure


Water Utilities


Number of companies by GICS sector in the ISS ESG universe that own fossil reserves, but don’t belong to the obvious reserve-owning GICS sectors. Source: ISS ESG

The Catch of Thresholds

But it gets more complex when investors dive deeper. Take, for instance, an investor who allows for limited fossil investments and sets the relatively common threshold of investing only in companies with less than 30% revenue from oil, coal, and gas. While the intention might be to avoid exposure to climate-harming business practices, the outcome might be the opposite; such a threshold-governed portfolio might result in holding the single largest coal producers worldwide.

How so? Well, take Glencore PLC and Anglo American PLC for example, these firms report only 5% and 19% coal mining revenues, respectively, so they would both make the cut under a 30% threshold, as the remaining revenues come from other business activities.

Glencore is, however, one of the world’s largest coal producers with its annual coal production accounting for nearly 2% of global coal production. It also ranks #10 in ISS ESG’s top coal reserves owners list. Anglo American accounts for nearly 1% of global coal production.

But there are even less obvious cases. BASF SE is another holding that could end up in a portfolio with intended reduced fossil exposure as the oil and gas reserves of the firm are not easily recognizable. As of May 2019, the chemical giant moved its oil and gas business into the Wintershall Dea joint venture and no longer consolidates its fossil revenues into its overall revenue disclosure—and its share of Wintershall Dea’s income is often overlooked under a revenue-based approach. Despite BASF’s 72.7% ownership of that business with oil and gas operations across Europe, North Africa, Russia, South America, and the Middle East, the firm manages to appear fossil light at first glance thanks to legal—but somewhat misleading—oil and gas revenue accounting practices.

Because of cases like these, ISS ESG recommends that client ESG practices combine revenue thresholds with other means of identifying fossil fuel companies, such as global production thresholds or deeper dives.

The Helping Hands in Fossil Extraction

Still not complex enough? Well, a dedicated “fossil free” investor might want to not only avoid reserve-owning companies, but also companies that are indispensable to the extraction and processing of fossil reserves. Especially unconventional extraction—hydraulic fracturing (“fracking”) might be in focus, for instance, and it is often not the most obvious companies that drive these practices.

Take firms like Siemens AG, ABB Ltd, General Electric Company, or Ingersoll Rand. With these industrial conglomerates in the portfolio, investors are, often unintentionally, exposed to highly specialized and customized products and services for unconventional fossil fuels. Critical components for fracking come, inter alia, from chemical holdings in a portfolio such as Dow Inc. and DuPont de Nemours, Inc. Through a financial firm like Brookfield Asset Management Inc., an unaware investor is exposed to the extraction of coal-bed methane, hydraulic fracturing, coiled tubing, wireline, pressure pumping, and other complementary oilfield services.

What is essential is often invisible to the eye. However, the good news is that it is no longer impossible for investors to navigate this space. ISS ESG Climate Impact Reports help detect all cases of exposure to fossil fuel ownership and involvement in controversial extracting practices. The Energy and Extractives team at ISS ESG works exclusively on creating transparency in this often non-transparent field to help investors going truly fossil free.

Now, you can enjoy a can of Coke in your Toyota with the security of fully understanding the producers’ role in the fossil fuel production cycle!

Xuan Li, Team Lead of Energy & Extractives Screening, ISS ESG, also contributed to this article.

This article was originally published by Institutional Shareholder Services (ISS).

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information in this report is not investment advice.

ESG Investing Solutions

Maximilian Horster

Head of Climate Solutions, ISS ESG

Dr. Maximilian Horster is Head of ISS ESG, based in Frankfurt, Germany. In this role, he leads a global team while assisting clients in developing and integrating responsible investing policies and practices through the provision of industry-leading solutions and data. In addition, he oversees the unit’s core Data & Analytics, Product, and Index offering as well as ISS’ dedicated climate team, and manages ISS’ financial intelligence unit, EVA. Dr. Horster joined ISS in 2017 following its acquisition of the financial industry business of South Pole Group, which he co-founded. Prior, he worked at Capital Group Companies in North America, Asia, and Europe and has, over the past decade, led several European Union-funded greenhouse gas accounting projects while also advising member states on the matter. Dr. Horster earned a PhD in history from the University of Cambridge.