For UKSIF and many of our members, the incorporation of natural gas into the UK’s green taxonomy would fundamentally change the taxonomy’s originally envisaged purpose as an objective, science-based tool to clearly define what is, and what isn’t, a ‘green’ economic activity.
The question of the treatment of natural gas in the UK’s green taxonomy has come into focus lately, following last month’s press reports that the UK government was “keen” to see this classified as ‘green’ within the taxonomy.
It has been indicated that the UK’s business secretary, Kwasi Kwarteng, supported natural gas’s inclusion on the grounds this would help shore up the UK’s gas supplies to prevent an energy crunch this winter, supporting the UK’s energy independence.
This justification comes amid the seemingly deteriorating energy crisis that the world is facing. Russia’s latest steps to cut off gas deliveries to many countries in Europe has compounded the crisis, and it is concerning to see some EU Member States planning to fire up coal-fired power stations in response, running counter to the bloc’s climate objectives.
Avoiding EU mistakes
Rooted in energy security considerations, the European Commission has already proposed classifying certain natural gas investments as ‘green’ in the EU’s taxonomy.
And, despite opposition from many quarters, including among many investors, the direction of travel in Europe seems to favour gas’s inclusion.
The final adoption of gas in its taxonomy could take place shortly we understand, with MEPs set to vote early next month at a Plenary session (an absolute majority of votes is needed for an objection of the Commission’s proposals).
In the UK, we are hopeful still this question has yet to be fully settled. This is why last week we wrote an open letter to the UK prime minister and government ministers, alongside other investor-led groups, the Institutional Investors Group on Climate Change and Principles for Responsible Investment, to express our strong concerns on natural gas’s possible inclusion in the UK’s taxonomy.
Many investors have long called for a taxonomy to give much-needed clarity on the portion of investments that can genuinely be considered ‘green’, allowing them to report on this transparently to their clients and savers.
It has been envisaged as helping assess the extent to which capital is flowing to activities contributing towards positive climate outcomes. Instead, we fear the taxonomy risks shifting from being based on science and not supporting the UK’s ambitious net-zero strategy and 2050 objective.
There are also potentially implications for clients and savers. We have concerns of the consequences for the UK’s work this year to develop an investment labelling system to help savers navigate the range of sustainable funds in the market.
This is because the proposed environmental criteria for funds to achieve a ‘sustainable label’ could be the proportion of a fund’s underlying assets that are aligned to the taxonomy.
Gas’s inclusion could lead savers to raise questions over their funds’ commitment to sustainability, should the new labelling system lean heavily on the taxonomy. In this scenario, ‘greenwashing’ would become more likely.
Finally, we want to combat the narrative that gas should be incorporated in order to bolster the UK’s energy security.
As we highlighted in our Delivering a Net-Zero Financial Centre report published last month, the taxonomy should not serve as a political instrument driving countries’ energy policies.
Gas may, of course, be necessary as a ‘bridging’ fuel during the net-zero transition and especially amid the energy crisis, but this does not mean gas can be considered ‘green’ in any form. The science has been clear that there is no remaining carbon budget for fresh investments in this area.
Its exclusion from the taxonomy would not prohibit investors from choosing to fund gas-related activities should they wish to, nor overnight lead to drying up of funding in the capital markets. Its inclusion would provide however misleading signals for institutions requiring clarity on ‘green’ activities in their portfolios.
The opportunities for the UK, both economic and in terms of its leadership on sustainable finance, are enormous should it choose the path of a purely science-based taxonomy. Just over six months on from the COP26 Summit, we would urge government to reflect on this vital decision and ensure the UK develops a credible and world-leading framework.