Sustainable investing-focused group the Institutional Investors Group on Climate Change (IIGCC) announced the publication of an open letter to European Union Member State representatives and parliament members, calling for gas to be excluded from the EU Taxonomy green investment classification system. The IIGCC membership includes over 370 investors, representing more than €50 trillion in AUM.

The EU Taxonomy is part of the EU Action Plan on Sustainable Finance, established by the EU Technical Expert Group on Sustainable Finance (EU TEG). The taxonomy is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives, starting with climate change mitigation and climate change adaptation, and no significant harm done to the other objectives.

The regulation went into effect at the beginning of this year, following approval in December, while the assessment of gas and nuclear energy as eligible areas for green investment remained ongoing. While gas and nuclear energy are often viewed as transition energy sources that will be required to facilitate the shift from fossil-based power to a greener energy system, several sustainability-focused groups have warned that their inclusion in the taxonomy could undermine the classification system’s purpose and open it up to concerns of greenwashing.

Earlier this month, the European Commission announced that consultations have begun on the inclusion of gas and nuclear energy as green investment areas under the EU Taxonomy classification system. While the commission said that these energy sources would only be classified in the Taxonomy under tight conditions, such as requiring gas to come from renewable sources or have low emissions by 2035, lawmakers from some member states, such as Germany and Austria, objected strongly to their inclusion.

In the open letter, the IIGCC lays out its own opposition to the inclusion of gas in the Taxonomy, highlighting the challenges it will create for investors as they aim to channel capital towards environmentally sustainable activities and pursue net zero investment goals. The investors wrote:

“The fundamental purpose of the Taxonomy is to enable capital to be channelled towards economic activities that are fully compatible with the EU’s commitment to climate neutrality by 2050 and reducing emissions by 55% by 2030. Moreover, the IEA net zero by 2050 pathway is clear that demand for natural gas will need to shrink by 8% below 2019 levels by 2030 and by 55% by 2050. Existing gas-fired power plants will also have to be phased out by 2035. Put simply, there is no remaining carbon budget for new investments in natural gas.”

Stephanie Pfeifer, CEO, IIGCC, said:

“As the cornerstone of the EU’s sustainable finance agenda, the inclusion of gas would undermine the credibility of the taxonomy as well as the EU’s own commitment to climate neutrality by 2050. 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.”

The letter pointed out that while natural gas may have a role to play as a bridge to support the transition to net zero, it does not meet the prescribed requirements to be classified as a transitional activity, and its inclusion in the taxonomy would be misleading. According to the letter, “any inclusion of gas within the Taxonomy would also undermine the EU’s ambitions to set the international benchmark for credible, science-based standards for classifying sustainable economic activities.”

Pfeifer added:

“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.”

“The inclusion of gas also risks channelling material levels of capital towards initiatives that undermine a sustainable, net zero future. We urge policymakers to vote accordingly.”