Gas Companies Are Eyeing Green Debt After EU Rulebook Inclusion

(Bloomberg) -- Gas companies in the European Union are wasting no time in working out how to take advantage of the bloc’s decision to include the fossil fuel within its green rulebook.

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

It’s a move that’s going to be controversial for many ethical funds, which may shun such debt offerings by fossil fuel companies. It’s also likely to further dent the ambition of the EU to make its green rulebook a “gold standard” for environmental investing.

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

To be labeled a European green bond, the proceeds would need to align with the EU’s so-called taxonomy, a set of criteria for investments covering a host of economic activities compatible with a target to reach climate neutrality by 2050. While the rules on gas require eligible projects to replace a coal facility and abide by emissions caps, the decision has led some to question whether that climate goal can now be met.

The argument from the Commission’s side is that gas -- as well as nuclear -- are technologies that will help allow countries across the bloc to transition smoothly away from the most polluting activities. Lawmakers in Parliament and member states have at least four months to object before the amended regulation enters into force at the start of next year.

It will have knock-on effects across a package of EU sustainable finance legislation, which includes laws designed to enhance ESG disclosures and the bloc’s green bond standard. The latter will likely also include gas and nuclear, Nomura’s Olszowka said. He added gas firms would probably now use green bonds instead of sustainability-linked debt for their financing.

Olszowka said he’d have rather seen the technologies included under a separate “amber” category for transitional investments. While banks such as JPMorgan Chase & Co. and BNP Paribas SA are vying to get green underwriting business, they are also under pressure from regulators and activists to clean up their lending portfolios.

“By including it in the green part it opens up the whole taxonomy to challenge,” Olszowka said. “It’s now harder to make the statement that the taxonomy is purely science-based.”

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