Gas companies eye green debt after inclusion in EU regulation

(Bloomberg) – Gas companies across the European Union are wasting no time figuring out how to capitalize on the bloc’s decision to include fossil fuel in its green rulebook.

Bloomberg’s Most Read

Nomura International Plc’s gas industry clients are already in talks with the bank about potential green bond sales, which typically come with lower borrowing costs given the high demand for ethical assets. That would be a boon after last week’s proposal from the European Commission to green label certain gas projects to help the continent move away from dirtier fuels like coal.

It’s a move that’s going to be controversial for many ethical funds, which could avoid such debt offerings by fossil fuel companies. It is also likely to further weaken the EU’s ambition to make its green regulations a “gold standard” for environmental investment.

“There will be emissions from these industries,” Jarek Olszowka, Nomura’s head of sustainable finance in Europe and the Middle East, said in an interview. “The risk is that it opens the EU to easy attacks.”

To qualify as a European green bond, the product would have to align with the so-called EU taxonomy, a set of criteria for investments covering a multitude of economic activities compatible with the objective of achieving neutrality. climate change by 2050. While gas rules require eligible projects to replace a coal-fired installation and meet emissions caps, the decision has led some to question whether that climate target can now be met.

The argument on the Commission’s side is that gas – as well as nuclear – are technologies that will enable countries across the bloc to smoothly move away from the most polluting activities. Parliament and member state lawmakers have at least four months to object before the amended regulation comes into force early next year.

This will have implications for a range of European legislation on sustainable finance, which includes laws designed to improve ESG disclosures and the bloc’s green bond standard. The latter will likely also include gas and nuclear, Nomura’s Olszowka said. He added that gas companies would now likely use green bonds instead of sustainability-linked debt for their financing.

There are also fears that incentives to invest in gas could mean funding for renewables is partially crowded out. Gas facilities are already doing “perfectly well” in terms of earnings and did not need to be included in the taxonomy, according to a report by EDHEC Business School.

“The inclusion of gas in the green taxonomy creates a real price distortion and a perverse incentive to limit future investments in renewable energy technologies,” write the authors of the report, including Frédéric Blanc-Brude.

Olszowka said he would have preferred to see technologies included in a separate “orange” category for transition investments. As banks such as JPMorgan Chase & Co. and BNP Paribas SA vie for green underwriting business, they are also under pressure from regulators and activists to clean up their loan portfolios.

“Including it in the green part opens up the whole taxonomy to be challenged,” Olszowka said. “It is now more difficult to assert that taxonomy is purely scientific.”

(Updates with risk of eviction in the eighth paragraph.)

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP

Comments are closed.