Delayed European reporting requirements for companies pose problems for asset managers, admits Fabian.
While gas is not an environmentally sustainable source of energy, gas companies should be allowed to transition to low-carbon business models and be recognised for their efforts without being blacklisted. This is according to Nathan Fabian, Chair of the EU’s Platform on Sustainable Finance (PSF), who spoke at a webinar today hosted by the UN-convened Principles for Responsible Investment (PRI).
The PSF is currently consulting on proposals for a brown taxonomy, delivering its final recommendations to the European Commission on 20 October. It aims to provide technical screening criteria for sectors and industries not considered wholly environmentally sustainable, yet have the capacity to transition away from causing significant harm.
“Not every investment has to – or can be – net-zero today,” he said. A carbon-intensive company may not be able to reduce its emissions fast enough or to the scale required in order to be included in the existing sustainable taxonomy, Fabian noted. But it may be introducing more sustainable operations and products to retain its appeal to investors.
“How do you ensure you do not unnecessarily blacklist these companies when keeping them out of the sustainable taxonomy?” he asked. “There is a nervousness in the market around this question. By the same token, this does not mean that we can call these companies sustainable.”
To be aligned with the proposed European brown taxonomy, companies will still need to prove that they have an exit plan in place and are actively transitioning away from high-emitting activities, he added.
To date, decarbonisation plans have helped the energy sector shift from the very carbon-intensive coal to the less carbon-intensive gas. This transition “made sense” and resulted in “big emission savings”, said Fabian. The problem, he acknowledged, lies in where to go next.
Companies now need to come up with cleaner energy solutions before 2030 if they do not want to be left behind as stranded assets, he warned. With gas prices recently soaring across the UK and Europe, in part due to governments moving to cut reliance on highly polluting coal and to shift to renewable energy, the shelf life of gas is increasingly coming into question.
“Can we call gas sustainable or green when considering the challenges? Clearly, the answer to that question is no. But that does not mean there is not an advantage to be had by retiring coal and using gas for a short period of time,” Fabian added.
This question is being further debated by European Parliament, following lobbying efforts made by both gas and nuclear energy companies to be included in the European sustainable taxonomy’s Climate Delegated Act (DA). The DA’s scrutiny period has been extended by two months, prompting concerns that its implementation will be delayed beyond the original January 2022 enforcement date.
This week, members of the European Parliament rejected two objections to the EU Taxonomy’s Climate DA, meaning that it has technically passed through Parliament.
The debate highlights that the “taxonomy cannot solve every problem, and we shouldn’t expect it to”, said Fabian. Responsible investors ultimately must make their own judgement as to when or if to cut all ties with gas, he said.
As part of the Commission’s sustainable finance framework, asset managers and corporates will be expected to provide evidence for their degree of taxonomy alignment through the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainable Reporting Directive (CSRD) respectively.
However, with CSRD expected to apply from 2024 – two years after Level 2 of SFDR – asset managers will not have all the relevant data to hand to inform their disclosures, making the whole process much more complicated.
“The PSF is having a very robust conversation with the Commission around what type of information can and should be used [by investors in the interim],” said Fabian. “We’re hoping asset managers can use reported data from ESG analysts and ratings agencies, because the needed company data is currently not there and companies need more time.”
New analysis by environmental lawyers ClientEarth has warned that including gas in the sustainable taxonomy would be “unlawful”. In a letter to the Commission, the law firm called on EU authorities to categorically exclude gas activities from the taxonomy, noting that methane gas has a global warming potential 86 times that of CO2 over a 20-year period.
“Gas is a fossil fuel – classifying it as environmentally sustainable is not only absurd, it’s also unlawful. The EU cannot keep its climate promises and give gas a free pass at the same time,” said ClientEarth lawyer Marta Toporek.