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Which Sustainable Funds Are Fossil-Fuel-Free?
Funds tend to have different definitions of what it means to be sustainable. Here's how advisors can assess which funds are truly fossil-fuel-free.
Sustainable funds faced continued headwinds in 2024. Returns lagged those of conventional peers, political scrutiny persisted, and greenwashing concerns endured. For the first time, US sustainable fund closures and departures outpaced new launches.
However, sustainable funds still make up a sizable portion of the investment universe. Despite $19.6 billion in outflows in 2024, total assets rose to $344 billion with the support of market appreciation. These funds tend to have different definitions of what it means to be sustainable—they might focus on green bonds, invest specifically in renewable energy, or aim to manage ESG risk.
In the latest Sustainability Landscape report, we follow trends in investor sentiment in this much-talked-about category. Here, we outline our findings on a group of sustainable funds that specifically contribute to climate action: fossil-fuel-free and low carbon.
What does "fossil-fuel-free" mean to asset managers? And how can advisors parse their options when choosing funds?
A Look at Fossil-Fuel-Free Funds
Funds define fossil-fuel free differently. For example, two State Street ETFs use the term “Fossil Fuel Reserves Free” in their names. These funds seek to limit exposure to companies owning “proved and probable reserves for coal, proved reserves for oil, and proved reserves for natural gas rused for energy purposes,” but they still have some overall fossil-fuel exposure.
From Morningstar’s perspective, fossil-fuel involvement is defined more broadly as a portfolio’s percentage exposure to companies that derive at least 5% of their revenue from thermal-coal extraction, thermal-coal power generation, oil and gas production, or oil and gas power generation, or 50% of their revenue from oil and gas products and services.
By this definition, only a few sustainable funds avoid investing in fossil fuels altogether.
Across the diversified sustainable equity funds domiciled in the US, we found the following as of April 11, 2025:
- 31 funds had no fossil-fuel involvement in their most recent portfolio.
- 17 funds had less than 1% fossil-fuel involvement.
- 33 funds had 7.5%-10% fossil-fuel involvement.
- 31 funds had more than 10% fossil-fuel involvement.
Another measure of funds’ fossil-fuel involvement is the Morningstar Low Carbon Designation, which is given to funds that have lower-than-average fossil-fuel involvement (but not necessarily complete avoidance) and low levels of carbon risk, which is the risk to companies in a portfolio of financial impacts in the transition away from fossil fuel. Of the 561 funds available April 11, 2025, 282 received the Morningstar Low Carbon Designation.
When it comes to exposure to thermal coal—considered the fossil fuel with the worst carbon impact—diversified sustainable equity funds have higher levels of avoidance:
- 159 funds had no thermal-coal exposure.
- 68 funds had less than 1% thermal-coal exposure.
- 5 funds had 3%-5% thermal-coal exposure.
- 5 funds had more than 5% thermal-coal exposure.
Avoiding Fossil-Fuel Involvement Requires a Closer Look
Just as investors have their own takes on what it means to invest sustainably, so too do funds. Investors should know that they won’t necessarily be avoiding fossil-fuel involvement completely by simply putting their money in sustainable funds—or even in funds that use the phrasing fossil-fuel free in their names.
To ensure avoidance of fossil fuels and investments in low-carbon options, investors should take care to evaluate funds using additional criteria such as our fossil-fuel involvement measure and the Morningstar Low Carbon Designation.
Get the full analysis in our annual Sustainability Landscape Report.
Learn how impact fits into the broader sustainable investing ecosystem and the suite of solutions and datasets available in Morningstar Direct.
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