A Response to “Revealed: European ‘green’ investments hold billions in fossil fuel majors”
The Guardian’s investigation revealing over $33 billion in fossil fuel investments within European “green” funds is more than just a greenwashing scandal—it exposes a fundamental flaw in how the investment industry approaches risk and opportunity in the 21st century. As someone who has spent nearly two decades developing investment strategies that address systemic risks, I can tell you that this isn’t just about misleading marketing. It’s about an investment establishment that remains dangerously tethered to an outdated understanding of what constitutes prudent portfolio management.
The Engagement Myth Has Already Failed
The funds identified in this investigation justify their fossil fuel holdings through the same flawed logic that guides Norway’s $1.5 trillion sovereign wealth fund: the belief that “engagement” with high-emitting companies will drive meaningful change. As Carine Smith Ihenacho of Norway’s fund recently stated, “we don’t think the climate will be solved by big allocation decisions…we think the climate will be solved by companies changing their investment.”
This sounds reasonable in theory, but the evidence tells a different story. After decades of shareholder resolutions, engagement meetings, and sustainability reports, no major oil and gas producer has plans consistent with international climate targets. Shell alone has over 800 oil and gas fields in development that threaten 5.3 billion tons of additional CO2 emissions—38 times the entire Netherlands’ 2021 emissions. Meanwhile, according to recent research, fossil majors remain “generally successful at minimizing the impact of climate-related and environmental shareholder activism, with most resolutions unsuccessful, and even successful ones having limited impact on company performance.”
The only engagement these companies will understand is declining share prices. The high-visibility divestment by major institutional investors represents the kind of market signal that could actually threaten their market capitalizations and force real change.
The Real Risk Isn’t in the Holdings—It’s in the Theory
These “green” funds holding fossil fuel stakes aren’t just engaging in greenwashing—they’re demonstrating the inadequacy of Modern Portfolio Theory (MPT) when applied to today’s economy. MPT, developed in the 1950s with no knowledge of climate science or systemic risks, defines risk as variance from historical returns and benchmark correlation. This backward-looking approach has led asset managers to view fossil fuel holdings as “diversification” rather than what they actually represent: concentrated exposure to stranded assets.
When Robeco’s spokesperson claims their Sustainable Global Stars fund has a “20% better CO2 footprint than the market index,” they’re inadvertently making our point. Benchmarking against an index filled with fossil fuel companies and then claiming environmental progress is like measuring health improvements against a baseline of chain smokers. They’re measuring progress against benchmark indexes that are themselves riddled with fossil fuel companies. As Norway’s fund demonstrates, this benchmark-hugging approach means “you have to have essentially the same holdings as the benchmark or your returns will start to deviate from it”—even when those holdings represent existential risks to the global economy.
The reductio ad absurdum of this thinking is that an “absolutely safe portfolio has zero variance from its assigned benchmark”—even if that benchmark is loaded with companies whose business models depend on destabilizing the climate.
The Economic Case Against Fossil Fuels Is Already Made
The investment case against fossil fuels isn’t primarily moral—it’s economic. The numbers are staggering: global investment in the energy transition exceeded $2 trillion for the first time in 2024, according to BloombergNEF’s latest report. This represents an 11% increase from 2023, with electrified transport alone attracting $757 billion and renewable energy drawing $728 billion. Meanwhile, investment in power grids—the infrastructure enabling this transition—reached $390 billion.
This isn’t happening because fund managers suddenly developed environmental consciences; it’s happening because clean energy technologies have become more competitive, more efficient, and more profitable. The mature clean energy sectors—renewables, energy storage, electric vehicles, and power grids—attracted $1.93 trillion in 2024, growing 14.7% despite policy headwinds, higher interest rates, and economic uncertainty.
Perhaps most telling is the geographic distribution of this investment. China alone invested $818 billion in the energy transition in 2024—more than the combined investment of the US, EU, and UK. This represents 20% growth year-over-year and accounts for two-thirds of total global growth in energy transition investment. While Western economies saw stagnant or declining investment in some cases, China’s comprehensive approach to clean energy deployment demonstrates the competitive advantage that comes from aligning capital allocation with economic reality.
The economic realities these “green” funds are ignoring become clearer every quarter:
- Clean energy investment now dwarfs fossil fuel investment by an enormous margin
- Mature clean technologies are attracting capital at accelerating rates despite challenging economic conditions
- Countries and regions that embrace this transition are capturing disproportionate shares of global investment growth
- Physical climate risks are already impacting fossil fuel infrastructure and creating uninsurable assets
- Regulatory pressure and carbon pricing are systematically increasing the cost of carbon-intensive investments
Yet fund managers continue to treat these as “ESG considerations” rather than material financial risks. They’re measuring risk by correlation to indexes that reflect the legacy economy rather than the economy that’s actually emerging—one where $2 trillion flows annually into energy transition technologies while fossil fuel companies face structural headwinds.
Solutions Creators Are Leading Economic Growth
What these misnamed funds fail to recognize is that companies creating solutions to systemic risks—renewable energy, energy storage, advanced agriculture, AI-driven efficiency—are already the primary drivers of economic growth. They’re not alternative investments; they’re the core of the emerging economy.
The companies addressing climate risk, resource scarcity, and social inequality aren’t just doing good—they’re capturing expanding market opportunities while traditional fossil fuel companies face structural headwinds. This represents a fundamental shift in where economic value is being created, but MPT-adherent managers can’t see it because they’re too focused on backward-looking correlation metrics.
The False Dichotomy of Returns vs. Responsibility
Perhaps the most pernicious myth revealed by this scandal is the belief that fiduciary duty requires holding fossil fuel stocks. Norway’s fund exemplifies this thinking when they claim their “purpose is really to create wealth for future generations” and they’re “not a climate policy tool.” This creates a false dichotomy that ignores the most basic investment principle: you can’t preserve wealth by investing in assets that face existential headwinds.
The fund proudly excludes investments in coal, tobacco, weapons, and even cannabis on ethical grounds, “to not make money from certain products.” Yet they maintain massive holdings in companies whose products have “already contributed to the deaths of millions through air pollution and catalyzed geopolitical conflicts that have destabilized entire regions.” The inconsistency isn’t just ethical—it’s financial. These are companies whose entire business model depends on externalizing enormous costs onto society and future generations.
As these externalized costs are internalized through regulation, litigation, and physical climate impacts, the apparent profitability of fossil fuel companies will evaporate. Smart institutional investors should be getting ahead of this trend, not lagging behind it.
What True Sustainable Investing Looks Like
Authentic sustainable investing doesn’t start with a conventional index and screen out the worst actors. It starts by asking: which companies are creating the most competitive solutions to our greatest systemic risks? This approach naturally leads to portfolios concentrated in renewable energy, energy storage, advanced materials, biotechnology, AI, and other sectors driving the transition to what we call the Next Economy.
This isn’t about “ESG overlays” on traditional portfolios—it’s about portfolios built from the ground up to capitalize on the economy that’s actually emerging. Instead of measuring success by correlation to fossil fuel-heavy benchmarks, these portfolios measure success by exposure to the technological and business model innovations reshaping every sector.
The difference is fundamental: instead of trying to make the fossil fuel economy slightly less harmful, Next Economy investing seeks to capitalize on the solutions-driven economy that’s already replacing it.
The Regulatory Response Must Address the Root Cause
The European Securities and Markets Authority’s new guidelines requiring clearer sustainability criteria are necessary but insufficient. As long as regulators allow funds to claim sustainability credentials while holding fossil fuel investments, they’re permitting systematic misinformation about investment risk.
True reform would recognize that in the 21st century, fossil fuel investments represent concentrated risk exposure, not diversification. Any fund using sustainability terminology should be required to demonstrate that the majority of its holdings create solutions to systemic risks rather than exacerbate them.
But the deeper fix requires abandoning the benchmark-centric approach that forces even well-intentioned managers into fossil fuel holdings. Investment theory itself needs updating for an economy defined by systemic risks and accelerating innovation.
The Power and Responsibility of Large Institutional Investors
The Guardian’s investigation reveals billions of dollars being misallocated under false pretenses, but the deeper scandal is the missed opportunity this represents. As Norway’s fund demonstrates, the world’s largest institutional investors have “outsized influence on whether investment flows to polluting industries or to climate solutions.”
These investors aren’t passive observers of economic change—they’re actively shaping it through their allocation decisions. When they continue funding fossil fuel expansion while claiming sustainability credentials, they’re not just misleading their beneficiaries; they’re subsidizing the very risks that threaten long-term investment returns.
The Norwegian fund’s Chief Governance Officer recently claimed that addressing climate change is “totally outside my scope.” This represents a fundamental misunderstanding of fiduciary duty in the 21st century. Large institutional investors are perhaps the only actors with the clout and long-term outlook needed to drive the rapid capital reallocation required to address systemic risks.
Beyond Greenwashing to Growth
The solution to this greenwashing scandal isn’t better marketing—it’s better investment theory. Asset managers need to abandon the backward-looking, benchmark-hugging approaches that lead to fossil fuel holdings in supposedly sustainable funds. They need investment frameworks that recognize systemic risks as material risks and solutions creators as growth leaders.
This means building portfolios not by screening existing indexes, but by identifying the companies most likely to thrive in an economy defined by resource efficiency, clean energy, and sustainable innovation. It means recognizing that preserving and growing capital in the 21st century depends on the resilience of the planetary systems on which all wealth ultimately depends.
The choice facing investors isn’t between profit and principle—it’s between investing in the economy of the past or the economy of the future. The companies creating solutions to systemic risks aren’t just doing good; they’re capturing the growth opportunities of the 21st century while traditional fossil fuel-dependent companies face structural decline.
Smart money is already making this choice. The question is whether the rest of the investment industry will recognize reality in time to benefit their clients—or whether they’ll continue hiding behind outdated theories and misleading labels while the Next Economy leaves them behind. The Guardian’s investigation should be a wake-up call: the era of claiming sustainability credentials while funding fossil fuel expansion is over. It’s time for investment managers to align their portfolios with both their marketing claims and economic reality.
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