Nuclear energy, why is it so important that it be a green investment?

Governments around the world reinforced their commitment to the environment with the signing of the Paris Agreement in 2016. The scientific evidence, increasingly palpable, has pushed the authorities to move from paper to facts. One area where steps forward have been taken is the European regulation on green investments.

“There is no longer any debate about the fact that the energy transition is underway and nothing is going to stop it,” Alban Préaubert, partner and fund manager at Sycomore Asset Management, told Finect. Much of the investment in the European recovery funds will go to projects directly related to energy efficiency and ecology. Or that, at least, they are related to this area.

“UBS estimated that to finance the efforts needed to achieve carbon neutrality by 2050 the need for annual global investment would be $5 trillion by 2030, or 4.5% of global GDP,” Préaubert said.

The way in which these disbursements are achieved on the European continent has created discrepancies between the member countries of the European Union. The green taxonomy, the new way of classifying green investments within the eu bloc, keeps governments that defend nuclear energy having the eco-label at odds with other nations opposed to that designation, such as Spain.

The new green taxonomy is a classification system for economic activities that contribute to meeting the European Union’s environmental objectives. This classification aims to determine whether an activity is sustainable or not. The ultimate goal is to assist companies and investors in making investment decisions by identifying activities that contribute to mitigating climate change.

This new framework would serve to increase confidence in green investments, those that meet criteria aligned with the European Green Deal. It is also about avoiding the so-called greenwashing, that is, that they try to promote as green investments that are actually harmful to the planet.

The idea is to help companies fund their own transition to achieve climate neutrality by 2050. Companies must communicate how much of their turnover complies with the European taxonomy. On the other hand, financial institutions have to report what is the percentage of loans dedicated to sustainable activities.

Nuclear, why is it green for the EU?

Brussels decided in early February to include nuclear power and gas as green energy within the new taxonomy. This, in the absence of the draft passing the filters of the European Parliament and the Council. But the European plan does not place them strictly on an equal footing with other energy sources, but at an intermediate point between polluting options and 100% renewables.

The new regulation would mean that nuclear power plants established before 2045 obtain the green label. The European Green Deal requires countries to invest in green reforms at least 37% of the funding they receive from the Recovery and Resilience Facility. Meeting this requirement is more accessible with the inclusion in the list of clean sources of an additional source such as nuclear. The goal is to guide investors towards sustainable investment pathways.

Brussels’ proposal aligns with the pretensions of France, a country heavily dependent on nuclear energy and which has plans to build new plants. The former German executive of the CDU, the party of former Chancellor Angela Merkel, was also inclined to support gas as clean energy, another of the sources that have generated the most controversy.

The bloc of opposing countries argue that nuclear and gas energy are put on the same level as renewables. The first does not emit greenhouse gases, but generates high-activity radioactive waste. Gas plants, on the other hand, emit carbon dioxide, but in less quantity than the coal-fired power plants they intend to replace.

“A positive aspect of this controversial proposal is that it opens the debate on the current difficult and delicate transition period until renewables (without gas or nuclear) can cover energy needs,” says Matthias Fawe, ESG and impact assessment analyst at Vontobel. This French manager believes that the european Commission’s plans will not change the perception of the main investors looking for sustainable products: “This type of investor coincides in considering nuclear energy as an exclusion criterion, as is the case with coal or oil,” adds Fawer.

From Federated Hermes they reflect on another argument in favor of nuclear. “The main idea of the European taxonomy for green investments is to create a differentiated financing cost for the different activities depending on the degree to which they are considered ‘green’,” says Ingrid Kukuljan, head of sustainable investment and impact at the US manager. “In the case of nuclear power, this point is especially important. Given the high capital costs and long durations, a 1% reduction in the weighted average cost of capital (from 7% to 6%) would translate into an average 10% reduction in the LCOE (levelised cost of electricity) produced by the new plants.”

Opportunity to invest in nuclear

The inclusion of nuclear energy as a green investment in the European taxonomy can be a before and after in the investment interest in this energy source. Michael Alsalem, head of the London office of AZvalor Asset Management, indicates that this energy is “the cheapest and cleanest to produce” and by costs is “extremely competitive with respect to renewables”.

This investment boutique has a fund with exposure to uranium, an element that is used as fuel in nuclear power plants. Azvalor Internacional, an equity vehicle, has small stakes of companies in the sector in its portfolio: Sprott Uranium Trust and the Canadian Cameco Corporation.

Precisely this last firm is one of the securities analyzed by the equity area of Singular Bank, together with Exelon Corporation and EDF. All of them listed for investors who prefer to select specific assets in the market to invest in nuclear energy.

If not, there is always the option of going to financial products with a 100% green guarantee. Finect’s socially responsible investment showcase includes a selection of vehicles from national and international managers. Among them, the Sycomore Fund Eco Solutions.

Source: The Economist