By Simon Jessop and Kate Abnett
LONDON/BRUSSELS, Jan 26 (Reuters) - European efforts to reach a common definition of sustainable investments risk fragmenting the market they sought to unify, as investors are deeply divided over which energy sources should be considered green.
A Reuters poll of 16 fund managers with $6 trillion in assets found that investors disagreed with Brussels' plan, drafted late last year, which seeks to classify investments in some types of natural gas and nuclear power as environmentally friendly.
The split among investors could signal a divergence in the green credentials of funds deemed sustainable, making it difficult for ordinary investors to judge and complicating Brussels' attempts to set a clear standard.
Some say labeling nuclear power and natural gas as green investments would help lower carbon emissions by encouraging the financing of facilities that help countries move away from the most polluting fuels, especially coal.
Others say nuclear power and natural gas are part of the problem, not the solution.
Although nuclear generates power without emitting carbon dioxide, the byproduct of nuclear electricity is radioactive waste. A gas-fired power plant emits about half as much carbon dioxide as a coal-fired plant, but is far from carbon-free.
Of the 16 investors polled by Reuters, five said they did not consider gas and nuclear to be sustainable, and four considered only one of the two fuels to be environmentally friendly. Five felt that both gas and nuclear were green in some circumstances, and two did not specify their opinion.
While other parts of the EU's taxonomy, or set of rules, came into force this month, the rules on gas and nuclear power have been delayed for more than a year after intense lobbying by the bloc's member states.
"Whether they are included or not, we would not consider them fully green," said Gemma Corrigan, head of policy and advocacy at the international arm of Federated Hermes, which manages $634 billion in assets.
The rules are intended to standardize disparate strategies and asset managers must report the extent to which their portfolios conform to the taxonomy.
Corrigan expressed concern about the impact on other required sustainability reporting if nuclear power and natural gas are lumped in with green investments in those reports.
"Including nuclear and gas would mean less transparency, a greater risk of mis-selling and potentially undermine the credibility of the regulation and the benchmark for setting science-based standards," he said.
Other investors pointed to the danger that the inclusion of gas and nuclear could undermine asset managers' commitments to reduce emissions associated with their portfolios to reach the EU's target of net zero emissions by 2050.
Philippe Zaouati, CEO of Mirova, said his company would reject the EU's eco-label - which it considers "useless" - for gas and nuclear power and stick to the company's own sustainability assessment.
A European Commission spokesman declined to comment on the Reuters poll. The Commission has previously defended the "clear and strict conditions" in its draft proposal for gas and nuclear investments, which it says are necessary to "facilitate the transition to a future based predominantly on renewables."
Once the Commission publishes a final proposal for rules, they could come into force from January 2023, unless vetoed by a large majority of EU member states or a majority of EU lawmakers.
THE STAKES ARE HIGH
The intensity of lobbying on the issue reflects the high stakes for the nuclear and natural gas sectors, which fear that their cost of financing will rise if they are not included in the green taxonomy.
From the investors' point of view, their inclusion could broaden the range of sustainable assets eligible for it.
Henrik Pontzen, head of environment, social and corporate governance (ESG) at Union Investment, which manages about E430 billion ($484.7 billion), said his firm already included gas in its sustainable investment products, and could revise its negative stance on nuclear power if the classification scheme is approved.
Guillaume Mascotto, head of ESG strategy at Jennison Associates, which has about $240 billion in assets, said gas and nuclear were necessary to ensure a smooth transition.
"We believe the inclusion of natural gas and nuclear power in the EU taxonomy is necessary to support a global and total - i.e., inclusive - transition to a lower carbon economy," Mascotto said.
Members of an expert group advising the Commission said this week that the draft rules were not in line with zero emissions targets for 2050 because they included gas-fired plants with above-average emissions and nuclear plants that could be commissioned too late to help reduce emissions in 2050.
Will Martindale, group head of sustainability at Cardano, which advises and invests on behalf of pension plans, is among those who say a taxonomy that forces some fund managers to deviate from it will make comparison more difficult for smaller asset owners.
"Essentially, I have to compare black box methodologies, something that, as an asset owner with limited resources, I might not have the skills, resources and knowledge for," Martindale said.
Jean-Jacques Barberis, head of Institutional and Corporate Clients and ESG at Europe's largest asset manager Amundi, said the industry needed common standards, but would find a way to do so.
"We will adapt to it, whether the European Commission decides to include gas and nuclear in the taxonomy or not," Barberis said.
($1 = E0.8872)
(Reporting by Simon Jessop in London and Kate Abnett in Brussels; additional reporting by Isla Binnie in Madrid; editing by Greg Roumeliotis and Barbara Lewis; translation by Flora Gómez)