Why are ESG funds sometimes invested in fossil fuel companies?

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ESG funds sometimes hold shares in fossil fuel companies because they can score well on governance and social measures while still being fossil-fuel businesses.

ESG funds have been found to hold shares of fossil fuel giants and mining conglomerates even when those companies are not “clean” in an environmental sense. The stated reason is that these firms may have excellent governance and robust social protocols for workers, meaning they are viewed as well-managed risks rather than purely clean operators.
ESG ratings can reward governance and social protocols even for dirty energy firms
In practice, ESG scoring can separate “governance” and “social” performance from environmental outcomes like emissions. A company can have a governance structure and worker-related practices that score well, while still operating a coal or other high-emissions business. This is why fossil fuel holdings can appear inside funds marketed under the ESG banner.
The ESG framework is described as risk management and disclosure, not a requirement to stop emissions
ESG is presented as a disclosure framework that tells investors what companies are doing and whether they have policies in place. It does not force a steel mill, or by extension an energy producer, to stop producing high-carbon output. Instead, the market decides whether to punish or reward based on the information provided.
ESG funds may prioritise “well-managed risks” over “clean businesses”
The holdings issue is framed as a mismatch between the label and the underlying business. Fossil fuel and mining companies can still be included because the governance and social components are seen as strong. In that framing, the fund is investing in risk management quality rather than environmental cleanliness.
The “genuineness” problem includes greenwashing and rating disagreements
The text highlights that “greenwashing” can occur when companies use net-zero pledges and offsets while the real-world actions may not match the claims. It also notes that ratings agencies can disagree sharply on how companies score, which can further affect what ESG funds end up holding. Together, these factors help explain why fossil fuel companies can remain in ESG portfolios.

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Why are ESG funds sometimes invested in fossil fuel companies?

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