Growing price instability in European energy markets has highlighted the concerns of some investors over European Commission plans to include fossil gas in the EU sustainable finance taxonomy.
As Russia’s invasion of Ukraine continues and EU energy ministers call for the replacement of Russian fossil fuels with energy efficiencies and renewable alternatives, the classification of gas projects as a sustainable activity is being increasingly questioned.
Oil and fossil gas sales accounted for nearly 36% of the Russian Federation’s budget in 2021, totalling over €100bn. Russia supplies around 40% of Europe’s demand for gas.
Investor groups have criticised the Commission’s plan to label fossil gas projects as green, saying that it undermines the taxonomy’s purpose of promoting climate-friendly activities. “It is disappointing that natural gas has been included within the scope of the taxonomy,” said Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change.
“The taxonomy – which is meant to be the cornerstone of the EU’s sustainable finance agenda – now risks undermining a credible pathway to net zero,” said Stephanie Pfeifer the CEO of IIGCC, whose members manage €50tn worth of assets.
The inclusion of fossil gas in the EU’s guide to green investments has also been criticised by sustainable investment network Eurosif. “The inclusion of gas and nuclear undermines the credibility of the EU taxonomy,” the industry group said in a press statement issued last month. “This decision will adversely impact both the credibility and usefulness of the framework for sustainable investors, thereby hampering the very objectives of the EU Green Deal it is seeking to support.”
The European Central Bank (ECB) has called the EU taxonomy “an important tool” to redirect investments towards environmental sustainability, but the inclusion of fossil gas has implications for the central bank’s efforts to green its monetary policy in line with its climate action plan.
A preview of the potential problems it presents comes from the Bank of Japan’s pioneering green financing facility. Intended to provide zero-interest financing to lenders supporting action to address climate change, the first auctions were held in January, when US$17.9bn in new loans were disbursed. However, documentation from electricity utility Jera and from Tokyo Gas shows that some of that funding is already being directed towards fossil fuel projects.
Similar ‘transition washing’ – when the impact or legitimacy of net-zero projects is overstated – is likely in Europe if plans to label fossil gas investments as green go ahead.
This page was last updated March 1, 2022
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