Political jousting about gas and nuclear energy as renewable energy sources

What's the color of energy? That is the question now that the European Commission has proposed to temporarily label natural gas and nuclear energy as sustainable. Johan Barnard (Head International Public Affairs) and Claudia Kruse (Managing Director Global Responsible Investment & Governance) talk about the importance of a taxonomy on a scientific basis.

What exactly is this taxonomy?
"The taxonomy is an EU tool that defines which economic activities can and can't be classified as climate sustainable," says Barnard. "Brussels is trying to combat greenwashing with this. Big investors such as APG can use this classification to show their stakeholders how many sustainable investments they make. It is the explicit intention that the list of sustainable economic activities has a scientific basis."

And gas and nuclear power are not on this list now?
Barnard: "When drawing up the list, the European Commission deliberately left two subjects out of consideration: namely the generation of energy with natural gas and nuclear energy. There was a fear that a political joust would ensue over these subjects. On December 31, 2021, the Commission nevertheless made an additional proposal to put gas and nuclear energy on the green (sustainable) list, temporarily and subject to conditions. At the request of the Commission, two groups of experts looked into this: the independent Sustainable Finance Platform on the one hand and experts from the Member States on the other. The Sustainable Finance Platform issued a negative advice on Monday, January 24."

What are the arguments for and against the inclusion of gas and nuclear energy?
"Advocates of nuclear power, including France, want it on the green list," Barnard says. "This is because nuclear energy hardly leads to CO2 emissions. Opponents of nuclear energy point to environmental damage from discharging cooling water, the safety risks and the problem of nuclear waste. On the basis of the do no significant harm principle of the taxonomy, the Sustainable Finance platform concludes that nuclear energy has to be excluded from the green list. According to the Commission, the temporary labeling of gas as sustainable is necessary in order to be able to phase out energy sources in the short term that are even more CO2 intensive, such as lignite or coal. A less stringent limit for CO2 emissions would then apply to gas compared to renewable energy sources. The Sustainable Finance Platform believes there is no reason to deviate from the general CO2 limit and points out that the supply of renewable energy is already increasing strongly, so alternatives will indeed be available."

What is APG's position on this?
"APG is a strong believer in science determining which economic activities contribute to sustainability and which do not," Kruse says. "The Federation of the Dutch Pension Funds explained this position on behalf of the Dutch pension sector in an article in December. We must have a sound basis in the discussion about sustainability with our stakeholders, in particular the participants of the pension funds. We therefore follow the Federation of the Dutch Pension Funds in its appeal to the Commission to take the scientifically substantiated advice of the Sustainable Finance Platform to heart."

The Platform also proposes to include an additional category in the taxonomy. What is APG's position on this?
Barnard: "The Platform does indeed suggest introducing a so-called orange or amber category, just like the Federation of the Dutch Pension Funds did before. This would then contain a list of economic activities that are not fully sustainable, but that do play an important role in the transition to sustainable energy. We think that's a better solution than including gas and nuclear energy on the green list, which dilutes it."

Does the outcome of the discussion still have an impact on APG's investments?
Kruse: "Not in general. The discussion is about whether an economic activity in which an investment is made can be marked as sustainable or not. The taxonomy leaves investors free to invest in economic activities that are considered sustainable or non-sustainable. In making that choice, we use our investment criteria and those of our fund clients to assess whether an investment is sustainable and responsible and also performs adequately financially. It can get tricky with the green bonds issued by the European Commission itself. If gas is on the green list, then these green bonds could also include investments in a fossil fuel. In that case, there is a chance these no longer fit in with the investment policy of our fund clients."

Update: February 3, 2022

Final proposal
On 2 February, the European Commission presented its final proposal. This shows that it does not comply with the advice of the Sustainable Finance Platform. The Commission maintains its wish that energy generation with natural gas should be subject to a less stringent CO2 emission limit than other energy sources. The Commission also disregards the Platform's criticism that it’s not certain that nuclear energy complies with the so-called 'do no significant harm' principle. Barnard: "The Commission thus ignores the wish of many climate, environmental and nature conservation organisations, governments, banks and institutional investors - including APG - that when considering whether or not an economic activity is sustainable, a scientific basis is needed."

Consequences
If this proposal enters into force unchanged, it will in any case have an important impact on the reporting of companies. "They must state whether their green-labeled activities include power generation with natural gas or nuclear power," Barnard said. "This will hopefully allow investors who wish to do so to avoid unintentionally investing in natural gas or nuclear energy."

APG will study the Commission's proposal in more detail in the coming period and discuss it with its fund clients. All in all, the proposal detracts from the benefit of taxonomy, Barnard argues. "That was that you can easily determine whether an economic activity is green or not. Unfortunately, that would now become unnecessarily more complicated if this proposal goes through."