Investment industry lukewarm on confirmation of nuclear in UK taxonomy

Chancellor is expected to announce nuclear will be in taxonomy on Wednesday but one manager warns drawbacks are economic not environmental.

There has been a lukewarm response to the UK government’s confirmation that it will look to include nuclear in its green taxonomy, with one London-based manager warning that the industry’s funding problems are economic rather than environmental in nature.

As part of a wider package intended to boost nuclear energy and carbon capture in the UK, chancellor Jeremy Hunt is expected to announce in the budget on Wednesday that the government plans to include nuclear in the country’s taxonomy, subject to consultation.

As part of the package, the government will also launch a competition for small modular reactors, as well as matching a proportion of private investment and taking steps to streamline the selection of sites for reactors.

Boris Johnson’s government mooted including nuclear in the taxonomy last year, but multiple changes in prime minister, chancellor and business secretary had left its status unclear.

However, a sustainability figure at one large UK manager said that the nuclear industry’s ability to attract capital has not primarily been about having to manage an unattractive ESG profile.

Speaking on condition of anonymity to discuss what they described as a very sensitive issue, the person said that on an objective level, nuclear compares favourably to other sources on environmental impact.

“The problem is fundamentally about the economics,” they said. “It is incredibly expensive and un-cost competitive when compared to the alternatives. If anything, I think some people have been using the ESG questions around nuclear to provide an easy out to not financing projects.”

Tom Greatrex, CEO of the Nuclear Industry Association, said the move “will drive crucial investment into projects large and small”.

However, the UK manager said they were unsure whether changing the taxonomic treatment of nuclear power would “massively affect” how easy it was for projects to attract capital. For public equity funds, the number of companies in scope is relatively small, they added, with only a “generous handful” across generation, uranium and fuel cycles.

James Alexander, CEO of UKSIF, told Responsible Investor that the taxonomy was only one tool used for informing investment strategies.

While the inclusion of nuclear in the taxonomy means “we could expect capital flows to shift towards these activities over the longer term”, the taxonomy will not necessarily be the primary factor in determining access to capital for various activities, he continued.

In its most recent batch of advice at the end of February, the country’s expert Green Technical Advisory Group warned the government to avoid the “political compromise” which saw the EU taxonomy result in a “real possibility of a departure from thresholds aligned to net-zero 2050 targets”.

Political pushback

Alexander Stafford, a Conservative MP and chair of a cross-party group of lawmakers focusing on ESG, warned that the UK was “in serious danger” of repeating the “grave errors” committed by the EU. While Stafford noted the importance of nuclear power in achieving net zero, he stressed that it should not simply be considered to be green.

“Any fudging of the UK taxonomy along the lines of the EU’s, which includes both nuclear and natural gas as so-called transition fuels, will see precious investor confidence evaporate, stymying the growth of green markets,” he said. “This would go down as an abject failure when policymakers should be doing everything in their power to encourage green investment.”

Becky O’Connor, director of public affairs at UK pension provider PensionBee, said: “There is a growing acceptance of nuclear’s potential as a pragmatic way to boost domestic energy security and meet carbon emission reduction goals. While nuclear is not a renewable energy and it is expensive, it is clean and reliable.”

At the same time, she added that nuclear’s role in the energy transition should not distract from renewables development, which should be the top priority.

PensionBee’s “positive impact” pension fund can invest in companies with exposure to both nuclear and natural gas, subject to strict criteria including revenue thresholds, do no significant harm, and governance tests. These firms were only included following their inclusion in the EU taxonomy.

In engagement with clients, exposure to deforestation, habitat destruction and animal testing were flagged as more important than nuclear energy or genetic engineering for exclusion screens, the provider said.