In our line of business, there are certain timings organisations choose when they want to bury a piece of news. So, when a European Commission draft document surfaced on 31 December mentioning that, under certain conditions, natural gas and nuclear investments would be included in its much-vaunted ‘sustainable finance taxonomy’ we couldn’t help but smirk.
Chief spokesperson Eric Mamer was quick to deny that was the Commission’s intent, but it didn’t really matter. In our hyperconnected world, it took all of five minutes for environmental organisations to howl in outrage at the perceived greenwashing, and for battle lines to be drawn between countries supporting the inclusion (France, the Czech Republic, Poland) and those opposing it (Germany, Austria, Luxembourg).
Perhaps more worryingly for the EC, there was one powerful constituency that was also left unimpressed by its move: the investors it so craves. In an open letter, Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change, a body representing some €50 trillion of pension and asset manager capital, said: “While there is a place for gas as a short-term bridge as part of a period of transition, it cannot honestly be classified as green. For institutional investors, the inclusion of gas will limit their ability 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.”
Unhelpful is definitely the right word. If the intention is to channel more money to natural gas investments, the EC’s proposals are redundant, albeit with worrying consequences. “Excluding gas generation from the taxonomy would not increase its cost of capital and thus not create any risk of underinvestment in the ‘transition fuel’ of choice. Conversely, including gas in the taxonomy creates a genuine price distortion and a perverse incentive to limit future investments in renewable energy technologies,” Frédéric Blanc-Brude, the director of the EDHEC Infrastructure Institute, writes in the upcoming March issue of Infrastructure Investor.
By raising the spectre of ‘greenwashing’, the EC’s proposals also distract from a complex, much-needed discussion: how do we invest in natural gas responsibly as a transition fuel and what is its place in investor portfolios?
The days when all natural gas had to do was show up and look cleaner next to coal are long gone. We know that, if done irresponsibly, natural gas assets can leak methane, a powerful greenhouse gas that is 80 times more potent than carbon dioxide.
To avoid that, we agree with Andy Lubershane, senior vice-president, research and strategy at Energy Impact Partners, that “we need to see a combination of buyer pressure and eventually strong regulatory pressure”.
The proposals attach stringent conditions to natural gas investments, thus delivering the regulatory pressure Lubershane alludes to. But they do so in the service of labelling these investments ‘green’, and that’s where the EC gets it wrong. Natural gas does not need strings attached to earn a misguided ‘green’ label. As the transition fossil fuel of choice, it needs strings attached – full stop.
The good news is that, if we deploy all the tools at our disposal, we stand a chance of being able to use natural gas “in a very close to net-zero manner”, as Lubershane put it, which might even hypothetically earn it a future beyond being a bridge fuel.
That, in turn, would help provide clarity as to its place in investor portfolios. Some of the trickiest questions these days – questions we explore fully in our forthcoming March Deep Dive – revolve around how to adequately price natural gas’s future and what, if any, terminal value some of these assets still carry.
The EC’s proposals, which will need to clear the European Council and Parliament, do nothing to help address these crucial questions.
Which just goes to show that, on New Year’s Eve, it’s probably best to stick to having a drink.