1 June 2022

Britain must not repeat the EU’s mistakes on green investment

By

In just eight years, renewables will be providing most of our electricity. But even then, we will still need fossil fuels until we decarbonise other sectors of our economy, including home heating and transport. Even beyond 2050, they will continue to play a part, but their emissions will be offset and stored.

But while oil and gas will play an essential part in our transition to net zero emissions and a role in our future economy, that does not make investing in these fuels ‘green’. It is a distinction that the UK government must make in its ‘green taxonomy’ – a new investment categorisation scheme to encourage capital to flow towards truly sustainable and environmentally friendly economic activities.

The European Union’s widely ridiculed decision to include gas projects in its green taxonomy undermines investor confidence in the whole policy. The UK shouldn’t make the same mistake as our EU neighbours. In setting our country’s green taxonomy, the Government must take a science-based approach to decide what should be considered ‘green’ or not.

As a sustainability index, it will increasingly play an essential role as companies begin to disclose their impact on the climate and shareholders scrutinise firms’ Environmental, Social and Governance (ESG) ratings. That’s why the credibility of the taxonomy is of paramount importance.

If reports are accurate that the UK is considering adding gas to its list of sustainable investments, like the EU, it begs the question, what is the point of a green taxonomy at all?

Unless the market can trust it as a valuable and science-based tool for labelling green economic activities, investors will not rely on it to decide which initiatives and companies to support. Consequently, it would undermine the Government’s efforts to win private finance for sustainable projects and stamp out ‘greenwashing’ – the practice of businesses claiming to be green, but doing little to help the environment.

The taxonomy will only sway industry and investors if its classifications inspire confidence. That’s why the Government should firmly reject the idea of labelling gas as green.

Leaving gas out of the taxonomy doesn’t mean depriving the North Sea of investment and denying capital to necessary oil and gas projects needed to support our transition. Financial institutions made the mistake of backing off from new fossil fuel opportunities on ESG grounds but must now support viable projects outside those initiatives rated as sustainable. An activity’s rating should not decide access to capital under the taxonomy. Nor should a non-green rating trigger harmful divestment from oil and gas. Investors and finance providers should balance their gas investments with corresponding support for technologies such as carbon capture and storage.

It is important that currently high-carbon businesses can get finance to continue their current operations, such as oil and gas extraction or steel manufacturing. But also so they can invest in decarbonising their businesses – whether that’s electrifying oil and gas platforms or converting coking coal blast furnaces to electric arc furnaces.

The taxonomy’s role is to make it simple for investors and shareholders to see what is green. The Government should look to another green finance measure it has introduced – climate transition plans – to help drive finance towards companies playing their part in the energy transition. These plans, which are being mandated for listed companies and financial institutions, will give investors confidence that companies are properly reporting on and managing the risks that climate action and climate policies pose to their operations and moving towards net zero.

The North Sea is a mature basin, meaning it is becoming increasingly expensive to extract new oil and gas, and production is in long-term decline. These businesses have a bright future in clean technology, not with fossil fuels. The UK’s oil and gas sector can provide the skilled workforce required to transform the North Sea into a net zero basin, powering the UK through offshore wind farms, capturing and storing carbon and producing clean hydrogen.

A science-based green taxonomy is an opportunity for the UK’s financial sector to attract more investment in sustainable projects. It also offers a constructive way to diverge from our EU neighbours.

With 90% of the world’s economy covered by net zero targets, we are headed towards a low-carbon future. The UK’s financial services can be at the forefront of this global transition, but the Government needs to provide confidence by creating a credible, science-based framework for green investments.

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Kevin Hollinrake is MP for Thirsk and Malton.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.