The Ultimate Guide to Fossil Fuel-Free Investing

The warnings from climate scientists are clear and urgent. The impacts of climate change are no longer a distant threat; they are a present-day reality. For a growing number of people, this awareness has sparked a powerful question: How can I stop my own money from fueling the climate crisis?

Your investment portfolio might be your single biggest connection to the fossil fuel industry. Without even realizing it, your retirement savings and investment accounts could be funding the very companies driving climate change.

But you have the power to change that. Fossil fuel-free investing is a powerful strategy to align your money with your values and support the transition to a clean energy economy. This is your ultimate guide to divesting from fossil fuels, building a climate-friendly portfolio, and investing in a sustainable future.

What Is Fossil Fuel-Free Investing?

Fossil fuel-free investing is an investment strategy that actively excludes companies involved in the extraction, production, and transportation of coal, oil, and natural gas from your portfolio. It is a specific and targeted form of ESG investing that focuses squarely on the "E" (Environmental) pillar, with a laser focus on climate change.

This strategy is also known as divestment. The global fossil fuel divestment movement, which started on college campuses, has grown into a massive global force, with institutions and individuals representing trillions of dollars in assets committing to pull their money out of the fossil fuel industry.

The core idea is simple but profound: if it is wrong to wreck the climate, then it is wrong to profit from that wreckage.

Why Should You Divest from Fossil Fuels?

There are two powerful arguments for going fossil fuel-free: a moral case and a financial case.

The Moral Case: Aligning Your Money with Your Values

This is the primary driver for most fossil fuel-free investors. You believe that climate change is an existential threat, and you no longer want to be a silent partner to the companies most responsible for it.

• It sends a powerful signal: Divestment stigmatizes the fossil fuel industry, revokes its social license to operate, and builds political pressure for climate action.
• It provides personal integrity: It aligns your financial life with your deepest convictions, which is a core principle of "building an ethical investment portfolio."

The Financial Case: Avoiding Stranded Assets

This is the argument that is increasingly convincing even the most profit-focused investors. The financial case for divestment centers on the concept of stranded assets.

• What are stranded assets? Fossil fuel companies are valued based on their proven fossil fuel reserves—the coal, oil, and gas they have in the ground. However, to meet global climate targets and keep warming below 2°C, scientists estimate that up to 80% of these reserves can never be burned. They must stay in the ground.
• What is the risk? If and when governments enact serious climate policies, these "unburnable" reserves will become financially worthless, or "stranded." Companies whose valuations are based on these assets could see their stock prices plummet.
• The conclusion: By divesting from fossil fuels now, you are not just making an ethical choice; you are making a prudent financial decision to protect your portfolio from the long-term risks of the energy transition. As we've explored, "Is Impact Investing Profitable?," sustainable strategies can often lead to better risk-adjusted returns.

How to Go Fossil Fuel-Free: A Step-by-Step Guide

Ready to take action? Here is a practical, step-by-step guide to divesting your portfolio from fossil fuels.

Step 1: Investigate Your Current Holdings

You can't divest if you don't know what you own. The first step is to screen your current portfolio for fossil fuel exposure.

• How to do it: The best tool for this is Fossil Free Funds, created by the non-profit organization As You Sow. You can enter the ticker symbol of any mutual fund or ETF, and the tool will give you a letter grade (A to F) based on its fossil fuel exposure. It will show you exactly which coal, oil, and gas companies the fund holds.
• What to screen:

• Your 401(k) or workplace retirement plan: This is often the biggest culprit. Use the tool to check the funds you are invested in. This is a crucial part of "aligning your 401(k) with your personal values."

• Your IRA and brokerage accounts: Check all the funds and individual stocks you own.

You will likely be shocked by what you find. Most broad market index funds, the bedrock of traditional investing, receive an "F" grade because they hold major oil companies like ExxonMobil and Chevron.

Step 2: Define Your Divestment Criteria

"Fossil fuel-free" can mean different things to different people. You need to decide how strict you want to be. The most common screen, based on the "Carbon Underground 200" list, excludes:

1. The top 100 public coal companies globally by reserves.
2. The top 100 public oil and gas companies globally by reserves.

Some investors go further, also excluding:

• Companies that provide services to the fossil fuel industry (e.g., pipeline operators, drilling equipment manufacturers).
• Utilities that burn a high percentage of fossil fuels to generate electricity.

Decide what level of purity you are aiming for. This will help you select the right funds in the next step.

Step 3: Find and Invest in Fossil-Free Funds

Once you know what to avoid, you need to find suitable replacements. Fortunately, the number of high-quality, low-cost fossil free funds has exploded in recent years.

What are your options?

1. Broad, Diversified Fossil-Free Index Funds: These are often the best choice for the core of your portfolio. They track a major index (like the S&P 500) but have a screen that removes all fossil fuel companies.

            Examples: The SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) and the iShares             MSCI ACWI ex U.S. Fossil Fuels Sector ETF (AXDX).

2. Clean Energy Thematic ETFs: These funds go a step further than just excluding fossil fuels; they proactively invest in the companies building the clean energy future, such as solar, wind, and battery technology firms.

            Examples: The iShares Global Clean Energy ETF (ICLN) is one of the largest and most             popular.

3. Actively Managed Fossil-Free Mutual Funds: These funds are run by managers who specialize in sustainable investing and can apply more nuanced screens.

            Examples: Green Century Funds is a leader in this space, offering a range of fossil fuel-free         funds and using their power as shareholders to push for corporate change.

When choosing a fund, always be on the lookout for "greenwashing." Use the Fossil Free Funds tool to verify that a fund that claims to be "green" or "sustainable" is actually free of fossil fuel producers. Some broad "ESG" funds still hold oil and gas companies, so you need to be specific. For more ideas, check out our list of the "Top 5 ESG ETFs," many of which have low fossil fuel exposure.

Step 4: Consider a Robo-Advisor

If building your own portfolio of funds sounds too complicated, a robo-advisor can be a fantastic solution. Many now offer specific climate-focused portfolios.

• How it works: You answer a few questions, and the platform automatically builds and manages a diversified, fossil fuel-free portfolio for you.
• Top Options: As we cover in our guide to the "Best Robo-Advisors for Sustainable Investing," platforms like Betterment offer a "Climate Impact" portfolio that actively divests from fossil fuels and invests in climate solutions.

Step 5: Don't Forget Shareholder Advocacy

Divestment is not the only tool in your toolbox. Even after you've cleaned up your portfolio, you can still have an impact through shareholder advocacy.

• What it is: This is the process of using your power as a shareholder (even a small one) to influence a company's behavior. This is done by filing or voting for shareholder resolutions that call for better climate disclosure, emission reduction targets, and other sustainable practices.
• How you can participate:

• Vote your proxies: Every year, you get to vote on shareholder resolutions for the companies you own (even inside a mutual fund). Don't just throw the ballot away. Vote in favor of climate-related proposals.

• Invest in advocacy-focused funds: Funds like those from Green Century have a dual mission: to invest in sustainable companies and to use their shareholder power to push other companies to improve. By investing with them, you are supporting this important work.

What About Your 401(k)?

For many people, their workplace retirement plan is the hardest place to divest. Your options are limited to a small menu of funds chosen by your employer.

• Investigate your options: Use the Fossil Free Funds tool to screen the funds in your plan. You might be surprised to find a "Sustainability" or "Social Choice" fund that has a lower carbon footprint than the default options.
• Advocate for change: This is a crucial step. Talk to your HR department and your colleagues. Demand better, fossil-fuel-free investment options in your 401(k) plan. The more employees who ask, the more likely the company is to listen.
• Use a "portfolio-as-one" approach: If your 401(k) options are truly terrible, you can use it to hold the "cleanest" asset class available (like a bond fund) and then use your IRA and brokerage accounts—where you have unlimited choices—to build out the rest of your fossil-free portfolio.

Conclusion: Invest in the Future You Want to Live In

Fossil fuel-free investing is one of the most powerful ways for an individual to take a stand on climate change. It is a declaration that you will no longer allow your financial future to be built on the foundation of a crisis that threatens our collective future.

By divesting from the industries of the past and investing in the clean energy solutions of the future, you are doing more than just building a portfolio. You are casting a vote for the kind of world you want to live in. You are sending a clear signal to the market that the age of fossil fuels is over.

The journey to a carbon-free portfolio may seem complex, but with the tools and strategies outlined in this guide, it is more achievable than ever. You have the power to make your money a force for positive change.

Now, it's your turn to take the first step: Have you ever checked your own investments for fossil fuel exposure? If not, are you willing to use a tool like Fossil Free Funds to see what you own?

Share your thoughts or your commitment in the comments below! Let's hold each other accountable and support one another on this important journey.