EU ‘green’ label for gas and nuclear

Insanity doesn’t just run through politics, it positively gallops. Especially when it comes to Environmental, Social, and Governance (ESG). But at long last, there is some good and sensible news from Europe.  After taking more than a year to make a decision, the European Commission has finally confirmed that a large number of gas and nuclear plants will in future be categorized as sustainable green investments - a decision that will annoy environmentalists across the world.

Part of the problem of the mad rush towards ESG, is that there is no standard agreement on what it means. It is a growing problem, and while the European Commission’s decision is a welcome corrective as far as energy is concerned, it does not solve the wider problem of what constitutes a “wicked” investment portfolio over a “virtuous” one.

The new rules, which still need to be approved by the European Union, will come into effect in 2023, when providers of financial products must disclose what share of their investments comply. The taxonomy does not oblige investors to make "sustainable"investments, it simply limits which ones can be marketed as such.

In case you missed the detail, the EC will allow gas power plants that emit less than 270g of CO2 equivalent per kWh, or have annual emissions below 550kg CO2e per kW over 20 years to be labelled green. This will likely include plants with relatively high CO2 emissions today, the caveat is that such plants must switch to run low-carbon gases by 2035.

New nuclear plants being constructed before 2045 will be classified as a green investment. The only condition is that the host country must be able to safely dispose of radioactive waste – hardly a deal breaker.

The taxonomy is aimed at preventing so-called greenwashing. Well, I daresay bringing gas and nuclear under the green umbrella is one of doing that, though I suspect it wasn’t what the environmentalists who complain about the practice had in mind.

Of course, the news rules are a welcome if belated recognition that the EU’s desire to embrace all things green en route to its goal of achieving net zero emissions by 2050 is crippling investment in still needed fossil fuels and damaging the lives of ordinary people as renewable energy remains utterly unable to fulfil consumer demand.

The EC decision comes against the backdrop of spiralling energy prices and fears that Europe’s reliance on imported Russian gas amid political tensions over Ukraine has left the continent facing an unprecedented energy crisis.

The taxonomy can also be seen as a recognition that investors and voters are increasingly frustrated with how far a largely subjective and ever widening ESG agenda infiltrates corporate decisions and people’s lives.

Last month, star fund manager Terry Smith, launched a blistering attack on Unilever, the huge global conglomerate that makes Dove soap, Lipton tea, Ben & Jerry’s ice-cream, and Hellmann's mayonnaise, over its ESG focus.

Smith, one of Unilever’s most prominent shareholders said the business was “obsessed” with sustainability to the detriment of its financial performance. In his annual letter to investors in his Fundsmith Equity fund, he said: “Unilever seems to be labouring under the weight of a management obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”

Unilever’s share price has lagged rivals in recent years and are down around 30 percent since 2019.

Shortly after Smith’s criticism Unilever launched a botched attempt to buy the consumer healthcare division of rival GlaxoSmithKline for $68 billion. The bid was embarrassingly abandoned and was followed by an announcement that Unilever planned to axe 1,500 jobs. I doubt of those workers prize ESG over a regular pay check.

Last year, the chief executive of UK outsourcing group Serco warned that “ever more purist ESG portfolios” was stopping companies working on contracts related to the UK prison and defence contracts.

It’s worth pointing out that funds that rank highly on “purist portfolio” ESG scoring systems often do so by investing heavily in technology stocks. Tech firms of course have low greenhouse emissions, but companies like Alphabet, Facebook, and Amazon, which ESG funds flock to, have been accused of other serious corporate failings.

Lest we forget, Facebook and Google owner Alphabet, have been accused of using algorithms that spread hate speech, wild conspiracy theories, and misinformation across the internet, while Amazon has been criticised for its labour practices.

Shouldn’t this be a concern for proponents of ESG?

EU nation states and the European Parliament have the power to block the rules, if they act quickly. That would require 20 of the 27 EU member states, or 353 members of the parliament voting against it. The former is extremely unlikely, but the latter could be achieved.

However, the smart money says the new rules will be approved, and hopefully usher in a wider recognition for balance, transparency, and honesty when it comes to financing, not just our energy requirements, but all investments.

We shall see. Meanwhile, it’s worth pointing out that the Dow Jones Oil & Gas Index is up more than 60 percent in the last year.

• Michael Glackin is an award winning UK-based journalist who specializes in UK, European, and US finance and economics, and Middle East politics and economics.