Changing investors' perceptions on nuclear in the midst of the war in Ukraine and Taxonomy inclusion

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EXECUTIVE SUMMARY

The non-objection period to blockade the Complementary Delegated Act (CDA) on gas and nuclear [1] presented on February 2nd, 2022, will expire by August 2022.

Nuclear energy presently accounts for a very low share of sustainable funds' assets (<2%) classified as article 8 and 9 [2]. Nonetheless, ESG or sustainability-minded investors’ appetite may evolve under the dual effects of the EU regulation and the war in Ukraine

This article is the result of an investigation on whether the inclusion of nuclear energy in the Taxonomy is susceptible to change investors’ stances regarding the atom. It is based on two surveys conducted by Natixis Green & Sustainable Hub in the first quarter of 2022. Investors were asked about their use of the European Taxonomy (whether it is solely for reporting purpose, or also investments allocation) and their stance on nuclear energy foreseeing its inclusion.

The two surveys are respectively made of 5 and 6 questions spread across three sub-topics:

  1. The use of the European Taxonomy in investment decision processes (surveys 1 and 2);
  2. The inclusion of nuclear in the EU Taxonomy (surveys 1 and 2);
  3. The energy independence of the European Union in light of the war in Ukraine (survey 2).

 

Our surveys revealed that sustainable investors are increasingly using the EU Taxonomy for investment decisions, notably to identify relevant activities and define exclusion thresholds. Even though EU SFDR funds’ (article 8 and 9) exposure to nuclear activities is decreasing, nuclear energy is seen as a facilitator of the energy transition by most article 8 funds due to both the planned evolution of the EU Taxonomy, and the new imperative of energy sovereignty. However, nuclear energy does not reach consensus among European investors; some express concerns regarding safety, security and waste management.

Regarding debt markets, as long as European sustainable investors are not faced with a real-life opportunity to invest in a sustainable financial product related to nuclear activities, it is hard to know whether positions will evolve.

 

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Table of contents 

I    -  The EU Taxonomy: a beacon in the mess of SFDR funds classification 
II   -  Despite a very low exposure of SFDR funds to nuclear activities...
III  -  ... Nuclear energy starts to appear as a key enabler of the energy transition
IV  
-  Nuclear activities inclusion in the European Taxonomy as a source of contention

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 I - The EU Taxonomy: a beacon in the mess of SFDR funds classification  

Sustainable funds are progressively starting to use the European Taxonomy as the SFDR requires them to report on their alignment to the classification system. Nonetheless, not aligning to the EU Taxonomy does not prohibit funds to be classified under SFDR’s Article 8 or 9 categories.

As a reminder, the Sustainable Finance Disclosure Regulation (SFDR) [2], which came into force in March 2021, distinguishes three categories of funds:

 Article 6 funds

Funds which do not integrate any sustainability criteria in investment processes.

Article 8 or light green funds

Funds promoting environmental or social characteristics.

Article 9 or dark green funds

Funds with environmental or social characteristics as their objective.


55% of investors surveyed by Natixis intend to use the taxonomy in their investment processes for SFDR funds (article 8 or 9), both to identify relevant activities and define exclusion thresholds. As part of their “green bond funds”, several investors are even considering setting targets of green bonds aligned with the Taxonomy.

II - Despite a very low exposure of SFDR funds to nuclear activities…

While the number of SFDR funds is growing at a steady pace - Article 8 and 9 funds’ assets reached $4.5trn as of December 2021, which makes up 42.4% of European Union’s assets under management [3] - most of sustainable investors are still reluctant to finance nuclear activities. Its inclusion in the EU Taxonomy has indeed been lively criticized (see our January 2022 article on Nuclear & Gas in the EU Taxonomy).

Today, article 8 and 9 funds’ exposure to nuclear is very low: their investments in nuclear reach $52.9bn, out of a total $4.5trn (~1.2%) as of December 2021. Compared to Article 8 funds, Article 9 funds tend to be proportionally more exposed to nuclear energy even if they might be more reluctant to invest in nuclear activities. Indeed Article 9 funds do not invest in in oil and gas (exclusion criteria) but are more flexible on nuclear.

In total, 16% of investors in EU primary bond markets currently exclude nuclear company issuers. This raises interrogation as this energy source is increasingly considered essential to reach carbon neutrality, at least in the short term [4].

III - … nuclear energy starts to appear as a key enabler of the energy transition

For article 8 funds, nuclear is increasingly perceived as a facilitator of the energy transition, especially considering two current significant developments:

  • The planned evolution of the European Taxonomy towards an inclusion of nuclear activities; and
  • The notion of energy sovereignty /independence, under the spotlight since the war in Ukraine.

However, our surveys highlight that this positive trend vis-à-vis nuclear energy does not reach consensus yet among investors. In addition to safety, security and waste management concerns, some investors – especially German, Austrian and Swiss – do not envision investing the sector as these countries have historically been opposed to the atom and multiple ISR [5]/Green labels explicitly exclude it for now. It is, for instance, the case of the French GreenFin label [6]. It remains to be seen whether these labels can evolve on nuclear with the final version of the EU taxonomy (adoption of the complementary delegated act).

For article 9 funds (most advanced in terms of sustainability), consensus is clear: nuclear activities will not be part of their investable universe.

Table 1 summarizes the proportion and the stance of SFDR Article 8 and Article 9 funds on nuclear based on our surveys.

Table 1: Proportion and stance on nuclear of SFDR sustainable funds

Sustainable funds

Article 8

Article 9

% of funds in Europe
(as of 31st December 2021) [7]

25.2% (5 862)

3.4% (797)

% of assets under management [8]

37.7%

4.7%

Stance on Nuclear

Partly susceptible to evolve with nuclear inclusion in the taxonomy and strategic autonomy considerations

Nuclear activities will not be part of their investable universe for safety, waste management and environmental concerns

Consensus

No

Some investors with historical stances on nuclear or relying on labels excluding Nuclear are less susceptible to change attitude towards nuclear

Yes

Source: Natixis GSH, based on our own analysis and Morningstar data

Table 2 gathers surveyed investors in groups according to their behavior vis-à-vis their use of the EU Taxonomy and nuclear energy. Three main groups have been identified: the “Followers” are opened to include nuclear activities in their sustainable funds; the “Pure players” are in a state of uncertainty and will proceed to case-by-case analyses; the “Dogmatics / Opponents” are clearly excluding nuclear energy from their sustainable funds.

Table 2: Sustainable asset managers’ main behaviors regarding nuclear energy

Investors’ group attitudes 

Weight of funds

Countries

Rationale & stance on nuclear

Likelihood to inflect this stance

“Followers”

Majority of assets, mainstream sustainable investors

Most of countries, especially France

Poised to invest in sustainable bonds including nuclear assets (UoP) because of the eligibility in the taxonomy on the one hand, and geopolitical developments on the other hand

Low

“Pure players”

Some green bonds funds, influential in the debate but not necessarily accounting for high volumes

Most of countries, especially US and France

Decide by themselves and use an "à la carte Taxonomy". They perform analysis and invest on a case-by-case analysis (with a priority given to climate, but attention to DNSH), crossing  Taxonomy criteria with their proprietary criteria and also labels. They want to avoid any form of controversy (applying the precautionary principle to safety/waste topics, but which can be convinced with robust arguments)

Medium

Dogmatics / Opponents

Not necessarily numerous, but noisy

Austria, Germany, Switzerland

Strongly opposed to include nuclear in sustainable finance products, in particular green bonds 

Low

Source: Natixis GSH


IV - Nuclear activities inclusion in the European Taxonomy as a source of contention  

The inclusion of certain nuclear and gas activities in the EU Taxonomy as “transitional activities” may encourage investors to invest (Table 1) by labelling them as “Taxonomy-aligned”, thereby reshuffling exclusion policies.

Note that the Commission proposes to introduce specific disclosure requirements for gas and nuclear activities. This would involve indicating the share of fossil gas and nuclear energy activities in the denominator and, where appropriate, the numerator of companies’ key performance indicators i.e., Green Asset Ratios [9] to “ensure the comparability of the information disclosed”.

On the legislative side, nuclear is still triggering debate. Its possible inclusion in the future EU Green Bond Standard also steered controversy. Finally, European Members of the Parliament opposed to the eligibility of nuclear activities have decided to lead the fight at the whole European Taxonomy-level.


To go further: 

  • Natixis Green & Sustainable Hub, “The clash between sovereignty and sustainability?” [second part on the Taxonomy criteria] , editorial, March 24th, 2022, available here.
  • Natixis Green & Sustainable Hub, “Nuclear & Gas in the EU Taxonomy: integrity safeguarded despite postures and outrages”, article, January 20th, 2022, available here.

[1] European Commission, Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities and dedicated Annexes, February 2nd, 2022, available here.
[2] As of December 31st, 2022, based on SFDR data, analyzed by Morningstar.

[3] European Commission, Sustainable Finance Disclosure Regulation (SFDR), November 27th, 2019, available here.
[4] International Energy Agency, Nuclear Power in a Clean Energy System, Fuel report, May 2019, available here.
[5] Concerning the ongoing ISR label reform, a certification with several levels is envisioned, but the previously evoked exclusion of controversial sectors (coal etc.) is not proposed any more.
[6] The recent update of the label annoyed management companies such as Mirova (see here). The label sets a new exclusion threshold of 5% of turnover dedicated to all fossil energy activities (including the downstream activities like transport and distribution) compared to the previous one of 33% of turnover.
[7] Based on SFDR data, analyzed by Morningstar.
[8] Idem.
[9] The proportion of credit institutions’ assets invested in taxonomy-aligned economic activities as a share of total covered assets.