Most governments of the European Union declare support for phasing out fossil fuels, however, they do not show the same environmental concern when it comes to investments in major oil companies. On Wednesday, EU member states reached an agreement that will facilitate the inflow of private “green investments” into companies developing new fossil fuel-related projects.
This means that oil and gas sector giants investing billions in new oil wells and gas fields could be included in sustainable investment funds. The condition is that they also invest in low-carbon projects such as renewable energy, hydrogen, or carbon capture and storage. According to several environmental associations, this initiative will significantly soften the European Commission’s proposal to revise the Union’s legislation on “green investments”.
Combating greenwashing and the Paris Agreement
The Commission aims to encourage sustainable financing flows to companies in the process of ecological transition, not just those that have already achieved it. The European executive body also wants to establish a clear distinction between the most environmentally friendly funds and so-called “transition funds”, so that consumers know exactly what they are investing in, and to combat greenwashing in the financial sector.
While the Commission’s argument that companies need access to capital to decarbonize their activities is widely recognized, environmental associations believe that the amendments proposed by the member states go too far. “This clearly opens the door to greenwashing and betrays the trust of investors and consumers who think they are putting their money into sustainable activities,” said Isabella Ritter, senior policy advisor at ShareAction, a non-profit association advocating for sustainable business.
The meeting of member states held on Wednesday took place against the backdrop of an unprecedented heatwave on the continent—a phenomenon that has become more frequent and intense due to global warming caused by the burning of fossil fuels. At the heart of the issue are the criteria by which companies can be included in “green investment” funds, as part of the ongoing review of the EU Regulation on the disclosure of sustainable finance information (SFDR).
The Commission seeks to exclude from these funds companies that carry out fossil fuel exploration projects, as this is incompatible with the goals of the Paris Agreement to limit global warming to 1.5 degrees compared to pre-industrial levels. However, EU governments want such companies to be included if they also spend at least 20 percent of their annual net investments, known as “capital expenditures,” on green projects.
Thus, they follow the arguments of the fossil fuel sector, particularly regarding the importance of new oil and gas projects, despite Europe’s desire to reduce its dependence on fossil fuels. However, according to sustainable finance experts, such easing of conditions could complicate the task for investors seeking to finance companies with a reliable plan to improve their environmental performance.
“One can argue about the exact definition of the expansion of fossil energy sources. However, an oil giant that continues to develop new fields cannot reliably claim to be in a full transition process, even if part of its investments… is directed towards renewable energy sources,” said Pierre Garraud, policy advisor at the European Sustainable Investment Forum. This idea could “sow confusion” among people seeking to invest their savings, he added.
The Council of the EU, which represents the governments of the member states in Brussels, must still convince the European Parliament and the Commission of its project before the regulation is updated. “This is the most political point of the SFDR, a dossier that is overall quite technical and enjoys broad consensus,” said a European Parliament official working with MEP Gerben-Jan Gerbrandy from Renew, who is leading the negotiations on this issue. “But now it is a source of political tension both in the Council and in the Parliament, where we expect the same,” he added.
From “dirty” to “clean” funds
Last year, the Commission proposed revising the green finance law, believing that the current rules create confusion about the types of companies that can be included in investment funds qualifying as “sustainable.” In its proposal, the Commission identified three categories of funds: investments in truly sustainable companies; investments in companies in the transition process; and investments that consider the fundamental principles of corporate social responsibility without going beyond them.
Investors will have to report on how their funds meet the criteria of each of these categories. The Commission stated that companies developing new fossil fuel-related projects should be excluded from both truly sustainable funds and transition funds to avoid misleading people who want to invest their savings in more environmentally friendly companies.
However, oil and gas companies opposed this idea. The French oil giant TotalEnergies, for example, argued that “excluding companies solely on the basis that they invest in new oil and gas projects, ignoring their significant and growing contribution to low-carbon energy sources, undermines the key goals that the European Union seeks to achieve.” The professional association Eurogas called this exclusion “disproportionate and inappropriate.”
In 2024, TotalEnergies spent over a third of its capital expenditures, amounting to 17.8 billion dollars, on new oil and gas projects (slightly less than 6 billion dollars), compared to 27% (or 4.8 billion dollars) on “low-carbon energy sources.” If EU countries manage to impose their will, the company could be included in the category of “transition” funds. “Clearly, some member states seem to have something to gain by allowing oil and gas sector giants to penetrate as many fund categories as possible under the SFDR,” notes Isabella Ritter from ShareAction.