ESG News EU TAXONOMY: A WRONG SHADE OF GREEN


Europe’s Green Taxonomy has been accused of greenwash- ing as it labels nuclear and gas as clean sources of energy. Mona Dohle looks at the implications for UK investors.


A policy proposal published at 10pm on New Year’s Eve is bound to be burying something controversial. While people across the continent were gearing up for fireworks and champagne, the European Commission broke the news that its classification for sustainable investments includes nuclear energy and gas. Nuclear power is often listed as an alternative to coal because it does not produce greenhouse gases. But its use is controversial because it takes tens of thousands of years for radioactive waste to decay. Natural gas is also a controversial because it is mainly methane, the second largest contributor to global warming. Including nuclear power and gas in the taxonomy could have far reaching consequences, explains Andreas Hoepner, profes- sor of operational risk, banking and finance at University Col- lege Dublin. He is also a member of the Platform on Sustaina- ble Finance, which is tasked with reviewing the European Commission’s proposals.


“The taxonomy applies to any bank loan, bond issuance and even to a significant amount of government refinancing. Reporting on taxonomy will apply to most investment funds marketed in Europe. And 37%, or €750bn [£625bn], of the EU recovery fund can only be accessed if you have a green proposal,” Hoepner said.


A unified voice


One powerful voice criticising the decision is the Institutional Investor Group on Climate Change (IIGCC), which represents more than 370 asset owners collectively managing £41trn, including the BT Pension Scheme, the Pension Protection Fund, the Greater Manchester Pension Fund and Railpen. Stephanie Pfeifer, chief executive of the IIGCC, warned: “For institutional investors, the inclusion of gas will limit their abil- ity to align their portfolios and investment with net zero. At a time when we need clarity, the inclusion of gas creates an unhelpful precedent and muddies the waters for investors looking to do the right thing.” However, the group has not yet resolved whether it also con- demns the inclusion of nuclear energy. Similarly, Eurosif, the European responsible investor organisa- tion, says that this is critical. “Including natural gas and/or nuclear energy would fundamentally change the nature of the EU Taxonomy, from a ‘green’ to a ‘transition’ list of activities,” and argued that these activities should not be treated as sus- tainable in the EU Taxonomy which is meant to be science-based.


26 | portfolio institutional | February 2022 | issue 110


The decision to include gas and nuclear energy in the Taxonomy was taken following lobbying from countries in Southern and Eastern Europe along with France, which are powered by nuclear energy and gas. But the proposals are subject to a consultation by the Platform on Sustainable Finance and will subsequently have to be approved by the European Parliament.


Biggest greenwash ever Hoepner believes the proposals will be met with opposition by the Platform. “My personal view is that this is easily the biggest greenwash ever. If this passes, up to 1.4 billion tonnes in CO₂ emissions could be declared green, it’s the equivalent of declar- ing that French fries are a salad. There will be a high level of agreement that this is a greenwash,” he predicts. Hoepner believes that the taxonomy might narrowly pass through the European Parliament but will face challenges in court. Aus- tria and Luxembourg have already announced that they plan to appeal against the inclusion of gas and nuclear energy. While the UK is working on its own taxonomy and is no longer formally bound by the Commission, the implications for UK investors could nevertheless be tangible. The new rules on green investments would, for example, affect funds marketed by European asset managers to the UK.


And with the EU being among the first to develop such a taxon- omy, it will influence the scope of similar initiatives developed in the US, China and Japan, among others.


A question of influence According to Joel Moreland, a principal consultant for Social & Environmental Finance, it is likely that the UK will adopt a similar approach to the EU. “All the signs are that we are going down the same route,” he predicts. “You have to think what powerful industry groups could influ- ence the decision. In France, the nuclear power industry has a lot of influence. Even though we don’t build nuclear power sta- tions here in the UK, the Tory party is a strong supporter of nuclear energy.” Moreland predicts that major gas producers, such as Shell and BP, will also lobby to include gas in the UK’s green taxonomy. The UK government has established a body to advise on imple- menting the taxonomy. The first proposals aimed at climate change mitigation and adaptation will be published in the first quarter, followed by proposals for the sustainable use and protection of water and marine life, the transition to a circular economy, pollution pre- vention, the protection and restoration of biodiversity and eco- systems, which will be released in 2023. But Hoepner stresses that the UK might benefit from developing more stringent rules. “This is a huge opportunity for the UK.”


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