Can Pensions Avoid Fossil Fuels?

How Fossil Fuel Exclusions Work

Fossil fuel exclusion in pension funds works through screening criteria applied by fund managers. These criteria identify and remove companies involved in the extraction, production, transportation, or sale of coal, oil, and natural gas from the fund's investable universe.

Most exclusion policies use revenue thresholds. For example, a fund might exclude any company deriving more than 5% or 10% of its revenue from fossil fuel activities. Stricter funds apply zero-tolerance policies, excluding any company with any fossil fuel revenue. The specific threshold matters — always check the fund's published exclusion criteria rather than relying on its name.

Which Pension Types Offer Fossil-Fuel-Free Options?

• Workplace pensions: Nest's Ethical Fund excludes fossil fuels. Other providers including Aviva, Royal London, and People's Pension offer ESG options with varying levels of fossil fuel screening. Check your specific scheme's fund list.
• SIPPs: The widest choice. Platforms like Hargreaves Lansdown, AJ Bell, and Interactive Investor provide access to dozens of explicitly fossil-fuel-free funds across equities, bonds, and multi-asset strategies.
• SSASs: Offer direct investment control, allowing trustees to implement bespoke fossil fuel exclusion policies. See our SSAS sustainable investment guide.

The Stranded Asset Risk

Beyond values alignment, there is a growing financial case for avoiding fossil fuel investments. Stranded assets are fossil fuel reserves that may become uneconomic or unburnable due to climate regulation, technological change, or shifting market demand.

The International Energy Agency (IEA) has stated that no new fossil fuel developments are needed under a net-zero pathway. As global climate policy tightens, companies with large fossil fuel reserves face increasing risk of asset write-downs. Pension investors with long time horizons — typically 20–40 years — are particularly exposed to this structural risk.

How to Check Your Pension's Fossil Fuel Exposure

To assess your current pension's fossil fuel exposure:

1. Request your fund's factsheet from your pension provider
2. Review the top 10–20 holdings for oil, gas, and mining companies
3. Check the sector allocation — look for "energy" or "basic materials" weightings
4. Ask your provider whether the fund applies any fossil fuel exclusions
5. Check for FCA sustainability labels under the SDR framework

For a comprehensive step-by-step process, see our guide on how to check if your pension is ethical.

Financial Implications

Switching to fossil-fuel-free pension funds is typically free of charge when done within your existing scheme. If a transfer to a new provider is required, there may be exit charges or other considerations. The ongoing charges for fossil-fuel-free funds are generally comparable to conventional alternatives — passive options typically charge 0.15%–0.30% per annum. An ethical pension adviser can help you assess the most cost-effective approach.