What ESG funds actually hold in practice
The First Trust EIP Carbon Impact ETF promises, in its own prospectus, to avoid or limit thermal coal exposure. Morningstar looked under the hood and found something else entirely: a substantial exposure to thermal coal producers. If a fund built specifically around that pledge can miss it by this much, what does the ESG label on your own fund actually guarantee about what's sitting inside it?
Not a lot, as it turns out. As You Sow's Fossil Free Funds platform ran the numbers on sustainable funds and found that a large majority of them hold at least some fossil fuel exposure. Here's the part that should give you pause: a comparison sample of non-sustainable funds showed a nearly identical rate of fossil fuel holdings. Same exposure, different marketing.
The First Trust fund's own paperwork sets a goal to avoid or limit thermal coal companies. Morningstar's assessment found the opposite happening in practice. Meanwhile the US sustainable fund market has blown past $10 trillion in total assets under management, so this isn't some fringe corner of finance we're talking about.
The gap between what these funds promise and what they hold isn't a rounding error. It's a structural feature of how "sustainable mandate" gets defined and enforced, and nobody's rushing to tighten that definition. If you're treating an ESG label as a guarantee of fossil-free exposure, you're working from a false premise. Check the holdings yourself before assuming your money is out of oil, gas, and coal.
Why this matters for how you invest
This isn't just a labeling quirk. It cuts straight into the financial logic ESG investing was supposedly built on. Proponents of ESG investing make a specific financial argument, not just an ethical one: fossil fuel companies are overvalued, they say, because their in-ground reserves get priced as if that fuel will be burned, when a huge chunk of it can't be burned without triggering severe climate damage. That thesis is the whole reason divestment from oil, gas, and coal became a core expectation of ESG products in the first place. When sustainable and non-sustainable funds end up holding fossil fuels at nearly the same rate, you're watching that expectation and reality pull apart for most funds wearing the label.
Morningstar flagged the First Trust EIP Carbon Impact ETF for missing its own avoidance target by a wide margin, and that's not a one-off embarrassment. Scale it against the $10 trillion sitting in the US sustainable fund market and small labeling gaps stop looking small. They translate into massive real-dollar fossil fuel exposure spread across millions of retail portfolios, held by people who thought they'd opted out.
Part of the problem is mechanical. Fund providers often lean on broad sector weightings or minimum revenue thresholds instead of zero-tolerance exclusion, and that's exactly the kind of screen oil and gas names can slip through. Retail investors who take the ESG label at face value, without ever checking underlying holdings, are the ones most likely to end up owning fossil fuel stakes they never intended to hold.
So what does an ESG label actually guarantee? Not much on its own. It tells you a fund considered climate risk somewhere in its process. It does not tell you the fund kept fossil fuels out of the portfolio. If you want fossil-free exposure for real, pull up a fund's specific holdings on a platform like Fossil Free Funds instead of trusting the word "sustainable" printed on the label. That kind of due diligence is the only thing that closes the gap the label leaves wide open.