Nuclear needs ESG classification for affordable investment

The nuclear industry must lobby governments and turn up the public relations machine to full to be recognized as an ESG investable asset if it is to be granted access to the vast amounts of capital in search of socially conscious projects, say investors.

ESG (environmental, social and governance) is a term used by capital markets to evaluate investible assets, projects, and corporate behavior based on how ethically sound they might be.

Investors’ clients are increasingly demanding their cash go toward socially conscious and ‘green’ companies, and how to pick which project is eligible is helping redefine where traders build their portfolios.

Nuclear power projects often remain badly represented by ESG categorization and, as a consequence, credit at every point in the supply chain is more expensive and harder to access.

“Today, nuclear power plant options are seen too large for the market, too costly on an overnight basis per kilowatt, or too expensive on a LCOE basis compared to alternatives, too long to construct and taken collectively, all together, too risky by the capital markets,” Department of Energy Director of the Loans Programs Office (LPO) Jigar Shah said during a World Nuclear Association (WNA) symposium on financing new nuclear builds.

New, smaller, modular reactors that are safe out-of-the-box, can be factory assembled, and are due to be commercialized over the next 5-10 years, could help fix some of the problems that make credit so hard to come by for larger plants, but as long as nuclear remains outside of the investment parameters used by renewables, it will always come second best for capital markets.

The industry must attract $100 billion in commercial interest to achieve the economic cost points necessary for the industry to grow and it must “start building airplanes and not airports” Shah said.

Defining the metrics

A study released in September by Generation IV International Forum (GIF) ‘Nuclear Energy: An ESG Investable Asset Class’ convened a finance industry taskforce to look at the nuclear industry’s ability to report against ESG data collection and accounting metrics.   

The report, which was produced in response to increased talk of taxonomies and whether nuclear energy should be included, is intended to be a living document that has been written “by the financial industry for the financial industry” as a reference and a guide to use when considering nuclear companies and their assets.

Financiers say their boards need to understand nuclear’s position as an ESG investable asset class as, to date, nuclear energy has largely sat outside the ESG debate, says Fiona Reilly, who oversaw the report as Co-Chair of the Economic Modelling Work Group (EMWG) for GIF and Chair of the Taskforce.  

“With so much money moved into the climate finance bucket, investors have to look at ESG metrics to ensure that the companies that they are looking to lend to are ethical and environmentally friendly and look at wider issues covered by ESG,” she says.

However, there are disagreements on which metrics should be included and recognized and, while efforts are being made – GIF focuses on the World Economic Forum metrics – ESG metrics are not harmonized across countries or industries.  

This, in some cases leads to ‘green washing’, and makes it especially tough for companies looking for financing from a cross-section of investors because no one is agreed on which information those companies must report to prove their ESG credentials.

“Nuclear energy, in combination with renewables, is the only way for countries to meet their nationally determined contributions (NDC) under the Paris Agreement and their Net-Zero commitments … Inconsistency in applying ESG reporting has nevertheless resulted in nuclear power having a higher hill to climb than other low-carbon energy sources,” the report says in its introduction.

ESG misunderstood

The industry’s response to the report has been mostly positive, but Reilly says some have been dismissive, claiming it is not a matter for those working in nuclear but for investors.

Meanwhile there is also a misunderstanding amongst some that ESG are simply ethereal and vague concepts, rather than a form of non-financial accounting that all industries must report against if they wish to access finance.  

For those with portfolios to fill, these are strict guidelines to follow.

“To the financing industry, ESG are data collection and accounting metrics that companies and projects need to report against to be able to show their credentials across a broad range of criteria,” says Reilly.  

Some investors have become frustrated with the perceived failure of nuclear power companies to properly engage with funds and the public on what they are doing and how it could play a pivotal part in the push toward net zero.

Many working in financing are convinced the climate crisis is a big deal, with some $10 trillion at risk over the next decade alone, and that nuclear should and can play a meaningful role in mitigating its worst effects, Nick Stansbury, Head of Climate Solutions at Legal & General Investment Management (LGIM), said during the WNA symposium.

Meanwhile, global attitudes toward nuclear remain largely negative which means governments are cautious to commit, he said.

“Nuclear power is both enormously cheap and at the same time unbelievably expensive … No one can explain to us why the cost structure in developed economies has been allowed to rise so dramatically to the point where the difference with Asian markets looks so eye watering,” Stansbury said.

“Investors can’t fix these problems for you, and I can see no evidence today that your industry is particularly galvanized to do anything about it,” Stansbury said, taking a swipe at the nuclear industry’s image and its efforts to be recognized as a safe and clean energy source.

From the financiers’ point of view, nuclear power could be a profit-worthy asset that should have direct access to large funds on a level playing field with wind, solar, and hydro.

But, without a broad, internationally recognizable set of metrics that are easy to report against, and are consistent across the entire energy industry, nuclear is likely to remain a black mark in any of the increasing number of investment portfolios dedicated to environmentally-friendly projects.   

By Paul Day