LONDON/BRUSSELS: European efforts to reach a common definition of sustainable investments risk fragmenting the market they aimed to unify, as investors are deeply divided over which energy sources should count as green.
A Reuters survey of 16 fund managers with $6 trillion in assets found investors were at odds over Brussels' plan, drafted at the end of last year, to class investments in some natural gas and nuclear power as environmentally sustainable.
The split among investors could herald a divergence in the green credentials of funds meant to be sustainable, making it harder for ordinary investors to make a judgement and complicating Brussels' attempts to set a clear standard.
Some say labelling nuclear and natural gas as green investments would aid the low carbon evolution by encouraging financing for facilities to help wean countries off the dirtiest fuels, chiefly coal.
Others say nuclear and natural gas are part of the problem, not the solution.
Although nuclear generates power without emitting carbon dioxide, the byproduct of nuclear electricity is radioactive waste. A gas-fired power plant emits around half as much carbon dioxide as a coal-fired one, but is far from carbon-free.
Of the 16 investors surveyed by Reuters, five said they did not consider gas and nuclear as sustainable, and four counted only one of the two fuels as green. Five deemed both gas and nuclear power to be green in some circumstances, and two did not specify their view.
While other parts of the EU taxonomy, or set of standards, came into effect this month, the rules on gas and nuclear power have been delayed by more than a year following intense lobbying from EU member states.
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"Regardless of whether they are included or not, we would not consider them fully 'green'," said Gemma Corrigan, head of policy and advocacy at the international business arm of Federated Hermes, which manages $634 billion in assets.
The rules are meant to standardise disparate approaches and asset managers are required to report the extent to which their portfolios are aligned with the taxonomy.
Corrigan raised concerns about the impact on other sustainability reporting that is required should nuclear and natural gas be grouped with 'green' investments in those reports.
"Including nuclear and gas would create less transparency, a greater risk of mis-selling and potentially undermine the credibility of the regulations and benchmark for setting science-based standards," she said.
Other investors flagged a danger that including gas and nuclear could undermine commitments by asset managers to drive down emissions associated with their portfolios to the EU target of zero, on a net basis, by 2050.
Mirova Chief Executive Philippe Zaouati said his firm would snub the EU's "basically useless" green label for gas and nuclear and stick with the firm's own sustainability assessment.
A spokesperson for the executive European Commission declined to comment on the Reuters survey. The Commission has previously defended its draft proposal's "clear and tight conditions" for gas and nuclear investments, which it says are needed to "facilitate the transition towards a predominantly renewable-based future".
Once the Commission publishes a final proposal for the rules, they could take effect from Jan. 2023, unless vetoed by a supermajority of EU member states or a majority of EU lawmakers.
Much at stake
The intensity of lobbying on the issue reflects how much is at stake for the nuclear and natural gas sectors that fear their cost of financing may rise if they are not included in the green taxonomy. From an investor point of view, their inclusion could broaden the range of eligible sustainable assets.
Henrik Pontzen, head of environmental, social and corporate governance (ESG) at Union Investment, which manages around 430 billion euros ($484.70 billion), said his firm already included gas in its sustainable investment products, and could revisit its negative stance on nuclear power if the taxonomy plan is approved.
Guillaume Mascotto, head of ESG strategy at Jennison Associates, which has around $240 billion in assets, said gas and nuclear power were needed to ensure a smooth transition.
"We believe the inclusion of natural gas and nuclear power in the EU taxonomy is necessary to support a global and total - meaning inclusive - transition to a lower-carbon economy," Mascotto said.
Members of an expert panel advising the Commission said this week the draft rules were not in line with 2050 net-zero targets because they included gas power plants with above-average emissions and nuclear plants that may launch too late to help cut emissions by 2050.
"Essentially I'm having to compare black box methodologies - which I as a resource-constrained asset owner might not have the skills, resources, knowledge to properly do," Martindale said.
Jean-Jacques Barberis, director of the Institutional and Corporate Clients division & ESG at Europe's biggest asset manager Amundi, said the industry needed common standards but would find a way.
"We will adapt to it, whether the European Commission decides to include gas and nuclear in the taxonomy or not," Barberis said.
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