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Will nuclear’s entry into UK taxonomy spur ESG fund investment?

Sizewell B nuclear plant
The government’s reclassification of nuclear power has been well received by many sustainability experts. (Photo: Si Barber/Bloomberg)

The chancellor’s announcement that nuclear power will now be classified as “environmentally sustainable” could pave the way for some investment funds with an ESG focus to look again at the energy source.

The UK government intends to classify nuclear energy as “sustainable” under its green taxonomy. Subject to consultation, chancellor of the exchequer Jeremy Hunt confirmed in his Budget announcement on March 15 that “nuclear power will be classed as ‘environmentally sustainable’ in our green taxonomy, giving it access to the same investment incentives as renewable energy”.

The UK does not have a clear deadline for finalising its taxonomy, after plans to legislate on the subject by the end of last year were shelved. The government is, however, due to publish an updated green finance strategy, with a swathe of environmental policies expected to be announced by the end of March in response to the US Inflation Reduction Act and its extensive green subsidy programme. 

Its reclassification of nuclear power was broadly well received by sustainability experts. “It was encouraging to hear the chancellor class nuclear as environmentally sustainable,” says Steve Malkin, chief executive of sustainability and net zero certifier Planet Mark. “This is a pragmatic step forwards given the climate emergency we are facing. However, this must come alongside greater investment into renewables, on land and sea, if we are to secure economy-wide decarbonisation.”

Moving nuclear power under the umbrella of sustainable energy may encourage some funds with a sustainable focus to look again at the energy source.

Expect ESG funds to increase investment

Whether to classify nuclear energy as a sustainable source is a debate that extends beyond the UK. The EU has been locked in fraught negotiations over its inclusion under its own taxonomy. In 2022, members of the European parliament rejected a motion against categorising nuclear energy as environmentally sustainable.

In February 2023, the EU agreed rules that allowed “renewable hydrogen” energy, in certain cases, to be created with nuclear power. The rules were established to the reported consternation of some German politicians.

Nuclear energy is not currently part of Canada’s planned taxonomy, although it remains part of the debate. Nuclear power is also excluded from its green bond framework. Published last year, the framework defines what kinds of projects can be funded through the Canadian government’s green bond issuances.

Nuclear’s entry into the UK taxonomy may, however, pave the way for funds carrying Article 8 and Article 9 status to invest in nuclear energy. Under the EU’s Sustainable Finance Disclosure Regulation, Article 8 funds invest in assets that have ESG characteristics, while Article 9 funds have sustainable investment as an expressed objective.

“Last year, nuclear energy was added to the EU taxonomy rulebook and now, with the UK government following suit, any funds which previously excluded nuclear investments will be reconsidering their decision,” says TwentyFour Asset Management portfolio manager Johnathan Owen.

“These regulatory changes combined pave the way for both Articles 8 and 9 funds to hold business with nuclear energy assets,” he continues. “Across the European utility sector, nuclear energy does form part of the generation profile for many of the leading operators such as Enel, Iberdrola and E.on, and so an increase in investment from such funds should be expected.”

One German investment manager remains unswayed by the reclassification of nuclear energy, on safety grounds. “In our sustainability funds, we have excluded nuclear power producers for many years,” says Union Investment head of ESG Henrik Pontzen. “We adhere to this assessment due to the disaster risk of nuclear power plants and the unresolved question of final storage. Technological developments that could lead to a different assessment of the disaster risks or the final storage problem are not to be expected soon.”

UK Sustainable Investment and Finance Association chief executive James Alexander says: “We’re not entirely wildly excited about the idea of nuclear being included in the green taxonomy”. 

“In the long term, the plan of the taxonomy is that it will drive investment flows,” he continues. “It is one of a range of tools in the toolbox that will drive capital in the short and medium term.”

“Realistically, I think people that invest in nuclear know what they’re getting into,” he says, pointing to nuclear plants that are currently under development in the UK. Alexander observes that these are behind schedule, over budget, and “tie up capital for a really, really long time”. He adds: “There’s a whole lot of other things [to be considered about] nuclear, other than whether or not it’s classified as green.”

‘Diverse investors’ for small modular nuclear reactors

Building out the UK’s nuclear capacity was a key recommendation made in Conservative MP Chris Skidmore’s net zero review. Published in January, the report called on the government to set out a roadmap to publish guidelines for different nuclear technologies, including “small modular nuclear reactors”. These are defined as usually as being sized at 300 megawatts equivalent or less, according to the World Nuclear Association, and have fast construction times. 

“Nuclear energy has always been divisive, and so the move by the government to classify it as ‘environmentally sustainable’ may go far to shift public perception and encourage wider support from environmental groups,” Owen says.

The government also announced a competition for small modular nuclear reactors, which is due to launch this year, as well as £20bn in investment in carbon capture technology. Law firm Ashurst energy partner Michael Burns says the reactors have “the potential to be a game-changer for the nuclear sector in the UK” and that “the smaller-scale of SMRs, with shorter development timelines, may attract interest from more diverse investors.”

The government’s approach to climate as set out in its Budget, however, was not universally endorsed. “The Budget has not matched the investment opportunity presented by the transition to net zero emissions as set out in the Skidmore review,” says Josh Burke, senior policy fellow at the Grantham Research Institute on Climate Change and the Environment. “It is not clear how this Budget is sufficient to support a more ambitious net zero strategy, which the government is legally required to publish this month.”  

The government’s next steps on its climate strategy is likely to be viewed in comparison with the significant subsidy plans drawn up by the US and the EU in their respective IRA and Green Deal Industrial Plan.

The European Commission proposed two major climate acts on March 16. The Net-Zero Industry Act will aim at accelerating and funding its production of clean technology, set against the target of producing at least 40 per cent of the clean technology it believes it needs to secure a green transition. The Critical Raw Materials Act, meanwhile, will target securing the supply of raw materials including the minerals needed for mobile phones and electric vehicles.

“This Budget should have begun serious consideration of a positive UK response to the global clean energy ‘arms race’,” says UKSIF’s Alexander. “The upcoming green finance strategy should give this further attention, particularly in light of actions outlined by the US, and more recently the EU,” he continues. 

Alexander says that investors want the government to provide “credible decarbonisation roadmaps for key economic sectors, including for those areas where policy clarity is particularly lacking, as well as incentives in place to unlock private capital into the wider economy and the UK’s [green] transition”.

A service from the Financial Times