Trouble brewing over UK proposals to classify gas as green energy

Whitehall's proposal to include natural gas in its forthcoming green taxonomy of sustainable investment opportunities has been criticised by three leading sustainable investment boards for risking damage to the policy's credibility with energy investors.

The position was set out June 21 in an open letter to UK prime minister Boris Johnson from the Institutional Investors Group on Climate Change (IIGCC), the UK Sustainable Investment and Financial Association (UKSIFA), and Principles for Responsible Investment (PRI).

Their argument is that natural gas will only be needed as a "bridge" during the transition, though they concede more gas is needed in the short term to protect energy security and sever the link between European energy markets and Russian gas, following Moscow's invasion of Ukraine in February.

The IIGCC, which represents investors with more than €50 trillion of assets, has also opposed natural gas's inclusion in the EU's green taxonomy. Brussels began consultations on including gas alongside nuclear power in the taxonomy in January.

"Very important short-term considerations on energy security must not be conflated with the taxonomy," the letter says. "Excluding natural gas from the taxonomy will not deprive gas-related activities from funding in the capital markets."

"The inclusion of natural gas would undermine the taxonomy's stated purpose, discrediting its value for many of our members, while also significantly damaging the UK's global leadership position on sustainable finance and climate action for years to come."

Observers expect the taxonomy to be published before the UK parliament's summer recess in July. Legislators originally anticipated their first look at the draft paper at the end of the first quarter, according to ESG Investor.

Whitehall published its energy security paper in April, setting out plans for a new offshore licensing round this autumn to spur gas exploration and arrest production declines on the UK's continental shelf. By including gas in the green taxonomy, the government would send a notable signal to investor markets, potentially attracting more investment flows into upstream projects from ESG-conscious pension funds and other institutional investors.

This would be controversial politically, with UK environmentalist groups demanding the government winds down its support of fossil fuels faster. Political discontent in the UK's governing Conservative Party is also growing, following a failed attempt by party members to dislodge Johnson over the Partygate scandal earlier this month. A report by centre-right think tank Onward estimates the Tories could shed more than 1.3mn votes if Whitehall backs away from its net zero commitments, according to the Guardian.

Stephanie Pfeifer, CEO of IIGCC, told ESG Investor: "The fundamental objection to natural gas being included in the taxonomy is that it is not green. The taxonomy is meant to be a science-based tool to define 'green activities' and thereby provide clarity to investors over which of their investments - both current and prospective - can be considered green."