How does Mindful Money identify Fossil Fuel companies?
Fossil fuels have long been a cornerstone of our global energy landscape, powering economies and societies. However, their environmental impact and contribution to climate change have raised crucial questions. At Mindful Money, we seek to identify companies involved in the fossil fuel industry and distinguish between those actively denying climate change and expanding their operations vs. those in a transition to renewable sources. Our approach considers various aspects, ensuring that investors can make informed choices aligned with their values.
What are fossil fuels and why should investors care?
Fossil fuels, including coal, oil, and natural gas, have traditionally fueled industries and daily life. However, the burning of these finite resources carries significant environmental and social risks.
Extracting fossil fuels often involves habitat disruption, deforestation, and the release of greenhouse gases, contributing to climate change and environmental degradation. Additionally, accidents such as oil spills and gas leaks can have catastrophic consequences for ecosystems and local communities. Socially, fossil fuel production can lead to land displacement, health issues, and social conflicts in regions where extraction occurs. The reliance on fossil fuels also hinders the transition to cleaner, more sustainable energy sources, posing long-term risks to global energy security and the well-being of future generations.
Generating power from fossil fuels further exacerbates these challenges. The combustion of these fuels in power plants releases large amounts of carbon dioxide and other pollutants into the atmosphere, contributing significantly to air pollution. This not only poses health risks to nearby communities but also intensifies the effects of climate change, leading to more frequent and severe weather events, rising sea levels, and disruptions to ecosystems.
Some fossil fuel companies have engaged in extensive lobbying efforts to influence environmental regulations. They have actively opposed measures aimed at curbing greenhouse gas emissions and have worked to cast responsibility for carbon footprints onto consumers. This lobbying and advocacy have shaped public perceptions and policy decisions, making it even more critical for investors to consider their investments' ethical implications.
Beyond environmental and societal risks, there are compelling reasons for investors to reconsider their investments in fossil fuel companies. Regulatory risk looms large as governments globally impose stricter emissions regulations in response to climate change. The fossil fuel industry also faces financial uncertainties stemming from shifting energy markets, evolving consumer preferences, and the possibility of stranded assets. Over the past decade, the fossil fuel industry has underperformed other global benchmarks, including the S&P 500, emphasising the importance of evaluating the long-term financial viability of these investments.
You can find out more about funds that don't invest in fossil fuel companies here.
How does Mindful Money find and categorise these companies?
Mindful Money aims to make consistent decisions and uses a range of credible sources and ongoing engagement with recent research to maintain a comprehensive list of companies engaged in the production of fossil fuels and those that generate power from fossil fuel sources. Mostly, we use a structured framework supported by data from Sustainalytics, a global screening service (covering 30,000 global companies), to collate and understand to what extent companies produce/use fossil fuels. We also review decisions from major global responsible investors such as the NZ Super Fund and the Norwegian Pension Fund (NBIM).
In our definition of fossil fuels, we categorise companies into sub-categories based on two critical issues: Fossil Fuel Production and Fossil Fuel Power Generation. If a company's practices align with more than one of these issues, they may be included in both sub-categories.
Further information on Mindful Money's overall methodology can be found here.
Fossil Fuel Production
We consider companies that are involved in any of the following relating to oil, gas, or coal to be involved in the production of fossil fuels:
- Exploration: The initial phase of searching for underground fossil fuel deposits through geological surveys and drilling exploratory wells.
- Production (including core services): Extracting fossil fuels from underground reserves and maintaining production facilities.
- Storage: Safely storing extracted fossil fuels in tanks, reservoirs, or pipelines.
- Transport (except by rail): Moving fossil fuels from production sites to distribution points or refineries using methods like pipelines, ships, and trucks.
- Refining: Converting crude oil into various petroleum products through processes such as distillation and cracking in refineries.
Our materiality definition includes a 0% revenue threshold for coal, shale oil, oil sands and Arctic oil, and/or >5% revenue for oil & gas.
Company profile: Shell, headquartered in the UK, is an integrated oil and gas company that explores for, produces, and refines oil around the world. Shell recently announced they will backtrack on their commitment to cut annual oil production by 2030, meaning emissions of an additional 29m tonnes of carbon dioxide per year, almost as much as New Zealand’s annual emissions of carbon dioxide. In 2021, Shell spent 7.6 times more on share buybacks than on total investments in low-carbon energies. Between 2020 and 2022, Shell spent on average US$2,329 million per year on exploration activities alone and, instead of transitioning out of oil and gas, Shell has plans to massively expand its production in the short term. Evidence shows the company is far from being on a climate change pathway aligned with 1.5°C of global temperature rise, as the company’s planned short-term expansion overshoots the IEA Net-Zero Emissions Scenario by 45%.
Fossil Fuel Power Generation
We consider companies that are involved in fossil fuel-based power generation when they
produce electricity or thermal energy from oil, gas, or coal to carry out their operations. This typically occurs in power plants, where fossil fuels are burned to heat water, creating steam that drives turbines to generate electricity. Alternatively, in some cases, fossil fuels are directly combusted to produce heat for industrial processes or district heating. Many of these companies are electricity retailers, but there are also many other industries that generate power from fossil fuels.
Our materiality definition includes a 0% revenue threshold for power generation coal and/or >5% revenue for oil & gas.
Company profile: Contact Energy is one of New Zealand’s largest electric utilities companies, generating 20% of the country’s electricity and supplying nearly 600,000 customers. The company has invested in a network of seven geothermal and hydro stations that have a generating capacity of 87% from renewable sources. Contact operates three thermal power stations that employ gas and diesel. Contact reports that these fossil fuel-powered facilities generated 8% of its total revenue in 2022. Two of Contact’s thermal power stations are slated for closure over forthcoming years. Once both plants close, an estimated 95% of Contact’s energy supply will be generated from renewable sources.
Which fossil fuel companies are in climate denial, and which ones are in climate transition?
Within the fossil fuel industry, there are companies making good progress with serious commitments to the climate transition, but also those that are doubling down on their expansion of fossil fuels and are way off meeting international climate targets. Mindful Money’s recent report highlights the differences between these types of companies and their ranging climate impacts.
There are eight thermal generators that are on the pathway to transition to renewable energy sources by 2040, including New Zealand’s Contact Energy. There are currently no major fossil fuel producers who meet the criteria for being aligned with a 1.5°C pathway. Unfortunately, despite many warnings from scientists and the International Energy Agency (IEA), there are still many fossil fuel companies increasing their exploration and production. Investors can check their holdings on Mindful Money’s Fund Checker and see whether a fossil fuel company is in transition (1.5°C pathway) or expanding production.