MEPs reject plans to include gas and nuclear in taxonomy in preliminary vote

If proposals are approved next month, it could widen the gap for asset managers between regulatory expectations and client demand.

MEPs pushed back Tuesday against plans to include nuclear and gas in the EU’s green taxonomy by supporting a resolution that would block the proposals.

Members of the European Parliament’s committees for economic and monetary affairs and the environment voted narrowly in favour of vetoing a Complementary Delegated Act (CDA) that would label gas and nuclear as compatible with the EU’s climate goals. The vote was 76 to 62 in favour of a veto.

The controversial proposals, outlined in February, would see the two business activities included in the taxonomy’s “transition” category on the basis that Europe will need them as interim energy sources on its way to decarbonisation. Advisers to the European Commission have spoken out against this interpretation, saying the category was created solely to identify the most efficient ways of conducting business activities in sectors that do not yet have viable green options, such as cement and steel. The availability of renewable energy should therefore preclude fossil-based gas from being eligible, they argue.

Unlike gas, nuclear energy could be considered climate-aligned, but there are major concerns over its other environmental and social risks. Many investors currently exclude nuclear from sustainability strategies on that basis.

“We recognise that nuclear is low on carbon, but we regard sustainability as a broader concept than just the environmental dimension,” said Adrie Heinsbroek, chief sustainability officer at Netherlands-based asset manager NN Investment Partners. He added that the firm does not regard electricity utilities as eligible for inclusion in sustainable and impact strategies “in case they construct additional or new nuclear-based power production installations”.

Heinbroek said companies actively involved in gas exploration can be included in such strategies if they are “committed to Paris Agreement and the subsequent reduction of carbon emissions”.

The four-month window in which the European Parliament and Council can halt plans to include gas and nuclear in the taxonomy will end next month.

For the council to trigger a veto, it would need at least 20 member states to oppose the CDA, making it highly unlikely.

Parliament, on the other hand, simply requires an absolute majority to quash the plans. And Tuesday’s vote was a litmus test for its final vote, slated to take place during a plenary session on 7 July. At least half of the 705 MEPs will have to support the resolution for it to pass.

Observers say a veto is unlikely, however, and lobbying is expected to ramp up following Tuesday’s result to ensure the proposals are accepted by a majority of MEPs next month.

If the CDA is approved by Council and Parliament, it threatens to widen the gap between regulatory expectations and the expectations of many asset managers’ clients, who do not see gas and nuclear as aligned with sustainability objectives.

Isobel Edwards, an analyst at NNIP, said that regardless of the EU’s final decision, the firm’s green bond strategies will continue to exclude gas and nuclear as eligible uses of proceeds.

“It wouldn’t be appropriate to suddenly include it even if the EU does, since our clients expect certain kinds of investments,” she said, pointing to less controversial activities such as renewables, clean transportation and green buildings. “If we suddenly started including gas and nuclear it would be quite a deviation. Other impact funds will likely have similar conditions, that their clients are used to certain types of allocations. So regardless of whether or not the EU approves it, it doesn’t mean asset managers can suddenly start including gas and nuclear in their green and impact strategies.”

Edwards suggested that, if the changes are approved, asset managers would in the future be required to clarify whether their fund has taxonomy commitments including or excluding gas and nuclear when talking to clients.

“For companies that want to issue gas and nuclear green bonds as well, they should think carefully about which fund managers this is going to be appealing for – since most funds will not be able to suddenly start including gas and nuclear as eligible when they have strong green and sustainability commitments as part of the fund,” she said.

It is unclear what will happen if the CDA is vetoed. It is possible it would be ditched altogether in favour of another approach. The EU’s advisers have suggested that, instead of putting gas into the green taxonomy, a new “amber” taxonomy could be developed to acknowledge the role of certain non-green energy sources in the transition to net zero. But it is also possible that the CDA will be reworked by policymakers ahead of a second attempt.