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ESG experts ‘extremely concerned’ over reports that UK green taxonomy will include natural gas

Labelling natural gas a green investment could 'seriously damage the UK’s leadership position on sustainable finance', UKSIF CEO James Alexander warns.

Sustainable finance experts have warned that including natural gas and nuclear in the UK’s upcoming green taxonomy could undermine the initiative’s credibility.

James Alexander, chief executive of the UK Sustainable Investment and Finance Association, said that he was “extremely concerned” by reports natural gas was being considered for inclusion, adding that this would fundamentally change the taxonomy’s purpose as a science-based tool.

“The UK must learn the right lessons from the EU’s recent experience with its taxonomy, and this means not using the taxonomy as a direct political instrument to drive our energy security policy. If implemented, this move could seriously damage the UK’s leadership position on sustainable finance in the coming years,” he said.

Alexander was responding to a report in Friday’s Daily Telegraph (subscription required) that business secretary Kwasi Kwarteng was “keen” to see natural gas included in the UK’s draft green taxonomy as a transition fuel, amid fears that increasing fossil fuel divestments could harm the UK natural gas industry.

Ben Caldecott, director of the Oxford Sustainable Finance Group at the University of Oxford, said there was “no upside in including gas, just downside”.

“We can have a robust, science-based green taxonomy that is adopted because it is trusted by the market, thereby supporting UK leadership in green finance – or we end up with something that is irrelevant because it has become debased,” he added.

“Profitable gas investments are not going to be excluded from capital markets because gas is not included in a green taxonomy. That view gives far too much weight to the impact of inclusion or exclusion on access to capital.”

Caldecott also noted that the green taxonomy was an opportunity for “constructive divergence” from EU rules that would improve the UK’s competitiveness.

The inclusion of fossil gas in the UK’s taxonomy would follow similar moves in other jurisdictions. Aside from the EU’s controversial inclusion of gas, South Korea added LNG to its taxonomy in November last year, while Sri Lanka’s green taxonomy released last week allows for natural gas under some circumstances.

Meanwhile, a UK government spokesperson told RI that there was “strong evidence” to support the inclusion of nuclear energy in the taxonomy.

The government’s support for nuclear as a low-carbon source of energy is not new. In its green financing framework, issued ahead of the first green gilt issuance last year, the Treasury said it had ditched nuclear from the framework as many sustainable investors have exclusions criteria for nuclear power, but that “nuclear power is, and will continue to be, a key part of the UK’s low-carbon energy mix”.