Published: 28/02/2014

Ethical Investment Services offers fossil fuel free portfolio options, and has done for many years. This is consistent with the widely agreed goal that we need to hold the increase in the global average temperature to a maximum of 2 degrees above pre-industrial levels. Scientists have calculated that to meet this target we can only burn 20% of the current known reserves of fossil fuels that sit on company balance sheets. The remaining 80% is becoming seen as ‘unburnable carbon’, which when realised will be a loss to investors who hold these assets.

This data presents a capital and moral risk for investors in fossil fuel companies. In March 2014 The Australia Institute, along with leading advocates for fossil free investments, Market Forces and 350.org, released a fossil fuel risk assessment of the top 200 Australian companies. They ranked each company into tiers with a suggested shareholder response for each.

Tier 1 is companies substantially involved in fossil fuel extraction. The report recommended shareholders divest of these companies. Well known companies in this tier include Woodside Petroleum, Origin Energy, Santos, Caltex and Whitehaven Coal.


Tier 2 is companies who have large downstream exposure to fossil fuels and again the recommended action is divestment. Companies in this tier include AGL Energy and gas pipeline companies APA Group and Envestra.


Tier 3 is companies that have significant absolute exposure to fossil fuels but where fossil fuels do not dominate the business in relative terms. Interestingly the suggested action for tier 3 companies is engagement or divestment. Companies included are BHP Billiton, Rio Tinto and Wesfarmers.

Tier 4 companies have indirect fossil fuel exposure and the recommended action is engagement. Companies in this tier are the big four banks (but not Bendigo Bank or Bank of Queensland) and Macquarie, insurance companies, waste services, rail and port companies, engineering and explosives companies.


Tier 5 (not listed in the report) is the remaining companies that have no exposure to fossil fuels, direct or indirect.


Very predictable and short sighted criticism arises arguing that by excluding certain fossil fuel companies investors give up the high returns generated by the natural competitive advantage Australian miners have. To address this issue in a quantitative way, the report removed tier 1 and 2 companies from the ASX 200 index to form a fossil free portfolio, and then retrospectively calculated how it would have performed over the 10 years to 31st December 2013. The ASX 200 returned 13.36% and the fossil fuel free portfolio returned 13.22%, with a performance correlation of 0.99. This shows a fossil free portfolio would not have harmed portfolio performance for Australian investors over this time frame. If the unburnable carbon science is correct, going forward it is reasonable to expect that a fossil fuel free portfolio will eliminate a material risk and potentially lead to out-performance, but time will tell.

This also points out that investors can confidently rule out fossil fuel options on ethical/environmental grounds (as distinct from the financial risk) without being concerned about performance. Ethical Investment Services has been providing advice that rules out tiers 1 to 3 for many years. In addition, several of the investment options that we offer also selectively rule out companies in tier 4 that we deem are not taking their environmental responsibilities seriously.

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