A coalition of sustainability-focused investment and sustainable finance organisations are calling on the UK government to keep natural gas activities being included as “green” under a new classification system identifying environmentally sustainable economic activities.

In an open letter published today by the CEOs of – the Institutional Investors Group on Climate Change (IIGCC), Principles for Responsible Investment (PRI) and UK Sustainable Investment and Finance Association (UKSIF), the organizations say that including gas in the UK’s green taxonomy would undermine the system’s credibility for investors and damage the UK’s standing on sustainable finance.

The initiative to develop a green taxonomy was initiated in 2020 by UK’s Chancellor of the Exchequer Rishi Sunak, in order to provide a common framework for determining which activities can be defined as environmentally sustainable, and to improve understanding of the impact of firms’ activities and investments on the environment while supporting the transition to a sustainable economy. With the publication last year of the Sustainable Finance Roadmap under the UK’s Green Finance Strategy, more details on the criteria of the Taxonomy were provided, along with requirements for companies and financial products to report their taxonomy alignment in terms of their environmental impact against these criteria.

The letter comes as media reports have suggested that natural gas may be included in the taxonomy as emerging energy security concerns following the Russian invasion of Ukraine have pressured governments to increase reliance on natural gas production to meet their near-to-mid term energy needs.

Stephanie Pfeifer, CEO of IIGCC, said:

“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.”

The controversy over gas mirrors that underway in the EU regarding the inclusion of gas and nuclear activities in its own green taxonomy system.

While the investor groups recognize the need for gas-based energy as the economy transitions to cleaner energy sources, they warn that conflating energy security needs with sustainability could damage the credibility of the taxonomy, writing:

“While the continued use of natural gas may be necessary as a ‘bridge’ during the transition, especially as countries respond to the ongoing energy crisis, this does not mean gas should be considered ‘green.’ Very important short-term considerations on energy security must not be conflated with the taxonomy. Excluding natural gas from the taxonomy will not deprive gas-related activities from funding in the capital markets. However, its inclusion will send very misleading signals to investors needing clarity on the alignment of their holdings with the UK’s objective of carbon neutrality.”

The letter adds that including natural gas in the taxonomy would conflict with the UK’s decarbonization  goals, stating that in order to align with the global ambition to keep temperature increase below 1.5°C, “there is no remaining carbon budget for new investments in this area.”

The investor groups also point out that the inclusion of gas would damage the credibility of the taxonomy, poised to be the “cornerstone of the UK’s sustainable finance regulatory framework,” by creating greenwashing risk, causing investors to “raise serious concerns over their funds’ commitment to sustainability.”

David Atkin, CEO at the PRI, said:

“Our global approach to climate change must be rooted in realism and as such we should recognise that natural gas may have a role to play in facilitating the transition in the long term. However, ultimately, the UK’s taxonomy can and should aim to demonstrate maximum alignment with a science-based transition, which is inherently inconsistent with the inclusion of natural gas activities within the taxonomy.”

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