Europe

Investors Unmoved by Proposed EU Taxonomy Shift

Complementary Delegated Act will make little difference to investor assessments of risks of nuclear and gas power.

The European Commission’s (EC) proposal to include nuclear and gas power generation projects under its Green Taxonomy is unlikely to lead institutional investors to incorporate these activities in sustainable investment strategies.

Released on 31 December, the EC proposed plan prompted criticism from Germany’s government and elicited scorn from NGOs as an attempt at “greenwashing” with no basis in science. The proposed inclusion is partly driven by concerns over future funding costs for ‘brown’ industries left out of the taxonomy, but sources have told ESG Investor that the inclusion of gas and nuclear energy will not change investor perceptions.

Natacha Guerdat, Head of Research at Swiss-based Asteria Investment Managers, said the proposal was a compromise between the interests of member states and weakened the objective of the taxonomy. She also highlighted the lack of progress on clean ways to dispose of nuclear waste. “Not only is [the proposed inclusion] not science-based but it is going against the International Energy Agency’s Net Zero scenario and the Do No Significant Harm principle. We will not change our position on these two industries, and we will be sure to reflect this in our reporting material required by Sustainable Finance Disclosure Regulation (SFDR),” said Guerdat.

The move was seen as unlikely to change the perception of mainstream investors seeking sustainable investment products. “We have not observed any signals from our clients that their intention is going to change,” said Matthias Fawer, PhD, ESG & Impact Assessment Analyst, at Zurich-based investment bank Vontobel. “Whatever the outcome on the taxonomy regulation, we expect a situation where asset managers might report a two-tier percentage of taxonomy alignment – one without and one with gas and nuclear contribution – just to remain transparent toward their clients and let them opt for their preference of what is green.”

Fawer said the proposal opened the debate about the challenges of the current transitional period until renewables – without natural gas and nuclear – can cover the region’s full power needs. “The discussion should be more about planning a phase-out period for nuclear power,” said Fawer.

The EC proposal argued that gas and nuclear are key to helping transition to low carbon power generation in Europe.

“Within the Taxonomy framework, this would mean classifying these energy sources under clear and tight conditions (for example, gas must come from renewable sources or have low emissions by 2035), in particular as they contribute to the transition to climate neutrality,” it said.

This could see funds that include nuclear and gas power still eligible to be labelled as green, or sustainable, despite concerns over their environmental effects and greenhouse gas (GHG) emissions.

Transition risks

With many asset owners and managers having committed to net-zero investment strategies during 2021, investment professionals are focused on decarbonising their portfolios and engaging with investee firms on emissions reductions, while adjusting to new regulatory requirements.

“We assume that the EU taxonomy is likely to have a direct, and indirect, impact on the European investment market,” said Henrik Pontzen, Head of ESG at German asset manager Union Investment, part of DZ Bank Group. “If the taxonomy declares nuclear power to be a sustainable business area based on its carbon footprint, we will examine how we can deal with this.” Like Guerdat, he highlighted that, as nuclear waste could not yet be disposed of safely, it would continue to be excluded from their sustainable funds.

Victor van Hoorn, Executive Director of Eurosif the European Sustainable Investment Forum, said to ESG Investor earlier this month in the outlook for environmental matters in 2022 that labelling something as green was not going to alter how institutional investors looked at the future. “There would, however, be damage to Europe’s credibility in terms of its commitment to the rigorous adoption of required policy tools,” he added. Van Voorn suggested, however, that asset owners would continue to invest based on risk and impact assessments.

Many are redoubling efforts to identify investment opportunities in renewable and sustainable energy. European decarbonisation projects have struggled due to underinvestment and bureaucratic holdups, according to industry sources.

The Institutional Investors Group on Climate Change (IIGCC), which represents over 370 members, also registered their objection to the proposed changes in an open letter.

The use of nuclear and gas in the short term, while low-carbon energy ramped up production, is accepted as necessary by a number of sources. “This does not mean these projects should benefit from a green label and risks undermining investor confidence in one of the most ambitious developments in sustainable finance to date,” said Ottilia Csoti, Funds, Finance & Regulatory Associate at London law firm Fladgate.

“SFDR is designed to avoid greenwashing and the inclusion of gas and nuclear will likely undermine the force of these provisions,” she added.

Regulatory moves

The EC has asked for feedback on the proposal from its independent Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance on a draft text of a Taxonomy Complementary Delegated Act. The response period was extended this week to 21 January.

Under the proposal, only gas and nuclear plants with the highest environmental standards would be considered green. Nuclear plants would also have to have strict waste disposal plans. Gas plants, meanwhile, would have a limit of how much carbon dioxide is released per kilowatt-hour of energy produced.

“The EU Taxonomy guides and mobilises private investment in activities that are needed to achieve climate neutrality in the next 30 years,” said the EC’s statement on the proposal. “The existing energy mix in Europe today varies from one Member State to another. Some parts of Europe are still heavily based on high carbon-emitting coal. The Taxonomy provides for energy activities that enable Member States to move towards climate neutrality from such different positions.”

Media reports laid the impetus for proposal at the door of France, which currently holds the revolving presidency of the European Council. France derives about 70% of its electricity from nuclear energy, due to a policy based on energy security, and is the world’s largest net exporter of electricity due to its low cost of generation.

Larger greenwashing concerns

The EU taxonomy had previously been questioned by investor groups around greenwashing concerns after a leaked paper in November 2021 proposed that eco-schemes – payments programmes designed to protect the environment – funded by EU agricultural subsidies under the Common Agricultural Policy could automatically qualify as green.

A letter from groups concerned about compromises was sent to the EC warning of potential pitfalls. “We are still waiting to hear whether EU agricultural subsidies are to be included in the EU Taxonomy,” said Dr Helena Wright, Policy Director at the FAIRR Initiative, to ESG Investor. “Investors expressed their concerns that industrial livestock production could be classified as green without consideration of risks,” she said.“It has been decided to delay the inclusion of the agricultural sector until the next Delegated Act,” said the EC after the leak.

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