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Definition

Exposure to companies active in the fossil-fuel sector

Exposure to companies active in the fossil-fuel sector is the share of investments in companies earning any revenue from fossil-fuel exploration, mining, extraction, production, processing, storage, refining or distribution, including transportation, storage and trade.

What is exposure to companies active in the fossil-fuel sector?

The EU Sustainable Finance Disclosure Regulation (SFDR) lists this as principal adverse impact (PAI) indicator 4. Annex I, Table 1 of the delegated rules measures the share of investments in companies earning any revenue from fossil-fuel exploration, mining, extraction, production, processing, storage, refining or distribution, including transportation, storage and trade. Fossil fuels include solid fuels, natural gas and oil.

Why does it matter to you?

An asset manager may ask how much revenue came from each activity and which legal entities the data covers. Any qualifying revenue makes the whole investment count. Missing it understates the share; treating fuel purchases as revenue overstates it.

How is this exposure calculated?

Classify each company in the portfolio yes or no using the any-revenue test. On each calculation date, divide the current value of investments in companies classified yes by the current value of all investments, including direct and indirect investments and cash or cash equivalents, then multiply by 100. Do not scale a holding by its fossil-fuel revenue percentage. A financial market participant's annual PAI statement averages results for 31 March, 30 June, 30 September and 31 December. Keep the revenue source, covered legal entities, investment values, calculation dates and assumptions.

What mistakes should you avoid?

  • Setting an internal revenue threshold when the rule says any revenue.
  • Weighting each holding by its fossil-fuel revenue share instead of using pass or fail.
  • Treating fuel bought for operations as revenue from a listed fossil-fuel activity.
  • Using one year-end snapshot for an annual entity-level PAI statement.

Is this exposure the same as financed emissions?

No. This indicator applies a yes-or-no company classification to investment value. Financed emissions allocate an investee's GHG emissions to the investor. The calculations answer different questions.

Does buying natural gas make a hotel group active?

No. Buying natural gas or diesel for buildings and vehicles is not fossil-fuel revenue. The hotel counts only if it earns revenue from a fossil-fuel activity.

Example

Suppose a hypothetical hotel group in Hong Kong reports HKD 400 million of total revenue, including HKD 2 million from selling diesel to boats at its marina. Fossil-fuel revenue is HKD 2 million / HKD 400 million = 0.5%. An EU asset manager holds EUR 8 million of the group in a EUR 200 million investment portfolio at a quarter end.

Exposure calculation: Any listed fossil-fuel revenue triggers the company-level test, so the full EUR 8 million enters the numerator. EUR 8 million / EUR 200 million x 100 = 4.0%. Scaling the holding by the 0.5% revenue share would give 0.02%, which is not the indicator 4 method.

This is one observation date. An entity-level annual PAI statement averages at least four quarter-end calculations.

Where it comes up

SFDR mandatory PAI indicator 4, share of investments in companies active in the fossil fuel sectorCommission Delegated Regulation (EU) 2022/1288, Annex I, Table 1, indicator 4Official sourcePass-or-fail classification when an investee company derives any fossil-fuel revenueJoint ESAs Consolidated SFDR Q&A, section IV, question 26; answer published 25 July 2024Official source

Related terms

Financed emissions

Financed emissions are the share of a borrower's or investee's gross GHG emissions allocated to a bank, fund or asset owner through the loans and investments it holds.

Weighted average carbon intensity (WACI)

Weighted average carbon intensity (WACI) measures a portfolio's exposure to carbon-intensive companies by weighting each holding's Scope 1 and Scope 2 emissions per million of revenue by its share of portfolio value.

Responsible Investing

Responsible investing considers environmental, social and governance information when investors allocate capital, manage holdings and use their influence to pursue stated financial objectives and, where applicable, sustainability objectives.

ESG integration

ESG integration is the systematic use of financially material environmental, social and governance information in investment analysis and decisions to improve the assessment of risk and return.

Sources

  • European Commission

    Annex I definition of companies active in the fossil fuel sector; Table 1 indicator 4 metric; Articles 4 and 6 entity-level statement and calculation requirements

    2026-08-21

  • Joint Committee of the European Supervisory Authorities

    Section III all-investments denominator; section IV quarterly averaging and question 26 pass-or-fail treatment of any fossil-fuel revenue

    2026-08-21

Last verified 2026-08-21

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Exposure to companies active in the fossil-fuel sector Definition | Keslio