Not-so-green Taxonomy Increases Workload for Investors

Labelling gas and nuclear energy as sustainable muddies the waters for net zero-focused investors.  

The EU Parliament’s decision to back a Commission proposal to include gas and nuclear energy in its environmental taxonomy is a “problematic outcome” for investors committed to transitioning to net zero.  

In response, sustainable finance experts say asset owners will need to use new rules to obtain more transparency from investee companies to minimise portfolio emissions, while managers will need to reappraise fund disclosures.  

A majority of 328 MEPs voted in favour of gas and nuclear energy being adopted into the taxonomy through a complementary climate delegated act (DA) last week, meaning they will now be considered sustainable and therefore suitable for investment via ESG-labelled fund solutions. 

“It’s a very problematic outcome because it undermines the rigorous science-based approach the EU has taken up to this point,” Simonetta Spavieri, Senior Engagement Analyst at Royal London Asset Management (RLAM), told ESG Investor. 

“It highlights the political nature of sustainable development, with investors left to deal with increasing incoherence and divergence between what science says needs to happen and the promises and targets made by governments.” 

To be included in the taxonomy, gas-fired power or heat assets must have lifecycle emissions below 100 grams of CO2 per kilowatt hour or “meet a number of stringent conditions and obtain a construction permit by 2030”, according to the Commission’s Q&A document. Further, gas plants must have credible plans to switch to renewable or low-carbon gases by the end of 2035.  

For nuclear, the DA outlines that investment in new Generation III+ projects already approved for construction will be considered a sustainable economic activity until 2045. Investment in existing nuclear installations to extend operational lifetimes will be considered sustainable under the taxonomy until 2040. R&D investment in advanced technologies that promote safety and minimal waste will also be covered. 

With lobbying efforts – particularly from gas companies – proving successful, Spavieri noted that there is also concern other carbon-intensive industries “will be lobbying to showcase that their transition is greener than others”. This opens the door to the taxonomy being further weakened, she said. 

RLAM is asking investee companies to not only provide evidence that they are not lobbying against climate-related regulation, but to be transparent about what they are lobbying for and why, Spavieri added.  

In March, a group of institutional investors, including Swedish pension scheme AP7, also launched a 14-point disclosure standard to ensure investee companies’ climate change lobbying aligns with the goals of the Paris Agreement.  

Members of the Joint ECON/ENVI Committee previously objected to the DA. 

NGOs, MEPs and environmental lawyers have also voiced their intention to take the Commission to court, arguing that the taxonomy now doesn’t fully comply with the climate targets agreed under the Paris Agreement. 

If both the Parliament and Council fail to object to the proposal by the 11 July, then the DA will enter into force and apply from 1 January, 2023.  

“Saving grace”  

The Commission has introduced additional disclosure requirements through Article 8 of the taxonomy regulation to help net zero-focused investors identify which funds have exposure to gas and nuclear-energy.  

The new disclosure rules require large listed companies to report the proportion of their activities linked to natural gas and nuclear energy. 

“The additional disclosure requirements are the saving grace of the DA, as they will allow asset owners to more easily screen sustainability-labelled funds,” said Elise Attal, Head of EU Policy at the UN-convened Principles for Responsible Investment (PRI).  

“Asset owners will still need to carefully review companies’ disclosures, so that they can really disentangle the degree of gas and nuclear exposure.” 

However, the inclusion of gas and nuclear energy in the taxonomy means more work for asset managers complying with the EU’s Sustainable Finance Disclosure Regulation (SDDR), said Spavieri.  

First, asset managers may need to rethink the existing categorisations of their sustainability-labelled funds.  

Second, as part of their precontractual SFDR disclosures, asset managers are required to indicate whether, and to what extent, any investments made by their Article 8 or 9 products are aligned with economic activities outlined by the taxonomy. The inclusion of gas and nuclear energy means asset managers will have to re-evaluate these disclosures.  

In April, a PRI report noted that early-adopter asset managers were already struggling to use the taxonomy to measure the sustainability of their funds and inform investment decisions, due to limitations in data and difficulties interpreting the criteria. 

Sticking to the science 

Despite the EU Parliament’s stance, investors that have made net zero commitments may choose to continue treating gas and nuclear energy as wholly unsustainable activities, experts told ESG Investor. 

Asset managers are seeing “incredible demand from asset owners and other clients” for science-led and net zero-aligned products, RLAM’s Spavieri said. 

PRI’s Chief Responsible Investment Officer Nathan Fabian, who is also Chair of the Commission’s Platform on Sustainable Finance (PSF), said that the taxonomy offers investors a “shopping list for a sustainable future”, adding that investors don’t need to “buy everything it offers”.  

However, the division between what net zero-focused investors want and what has been deemed sustainable by EU lawmakers could lead to some unwelcome “fragmentation in the market”, PRI’s Attal warned. 

“We expect that some investors will feel obliged to make big statements that will outline their stance on the taxonomy and how they intend to view gas and nuclear energy,” she said.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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