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ESG, Nuclear Power, and Proxy Voting

The European Commission proposed last year to add natural gas and nuclear power to the so-called EU Taxonomy of clean, sustainable energy sources. Early last month, the EU Parliament voted to include both on its list of economic activities that further the EU goal of achieving carbon neutrality.

That will not be the end of the argument over whether either natural gas or nuclear power belongs in the EU taxonomy. This is a big win for the nuclear industry and makes it possible for industry participants to be included in funds that claim the ESG — environmental, social, and governance — mantle.

World Nuclear Association analyst David Hess wrote in June before the EU vote, “[N]uclear energy is capitally-intensive, and the long planning and construction times makes projects more sensitive to the costs of capital than almost any other energy technology. Inclusion in the taxonomy is therefore vital for unlocking access to affordable financing for nuclear energy and for making nuclear projects investable to a larger pool of private investors.” Required financing for nuclear power generation projects could run as high as €550 billion through 2050 according to an EU forecast.

In March, S&P Global, itself a producer of ESG ratings, cited a Berenberg ESG survey of more than 200 fund managers in Europe and North America that showed only 37% of funds banned investments in nuclear assets. Not least among the benefits this classification has to nuclear projects is the ability to offer green bonds to finance new nuclear projects.

Opposition remains. A Greenpeace sustainable finance campaigner commented, “It’s dirty politics and it’s an outrageous outcome to label gas and nuclear as green,” adding that the taxonomy decision is “shameful backroom dealing on behalf of the fossil fuel and nuclear industries.”

Austria and Luxembourg had been threatening to take legal action if the proposal passed. Germany also plans to shut down its last nuclear reactors at the end of the year.

Proxy voting advisor Institutional Shareholder Services weighed in back in January against the inclusion of natural gas and nuclear-powered energy generation, stating, “None of the newly proposed activities are considered to have a net positive impact,” according to a report by Thomas Cox in Environmental Finance. ISS assesses the impact of products and services based on their ability to reach the United Nations’ Sustainable Development Goals.

ISS noted that nuclear energy generation does offer “relative climate benefits” when compared to other energy resources but called nuclear a “significant obstruction” to the U.N.’s SDG objective of providing affordable, reliable, sustainable, and modern energy while yielding only a “limited contribution” to mitigating climate change.

ISS emphasized its objections to natural gas and nuclear power: “It could be argued that the extension of the taxonomy will divert investments from feasible and truly low-carbon technologies.” That argument assumes that nuclear power is neither feasible nor “truly low-carbon.” Similarly, the argument may also focus more on ESG reputational risk than actual climate change mitigation.

Investors are being invited to infer that spending on nuclear power is wasting investment on a technology that is not “truly low-carbon.”

According to corporate governance think tank The Corporate Citizenship Project, the reluctance of proxy advisors and ESG activists to consider nuclear power earnestly indicates their lack of seriousness in addressing climate change.

“Once completed nuclear power emits no more carbon than any renewable fuel. ISS also doesn’t appear to consider that nuclear energy, like natural gas, may be a bridge fuel until the world reaches virtually 100% renewable power generation. Regardless of cost and timeliness, the near-zero emissions level of nuclear energy may be needed to avoid making the planet any hotter than current forecasts,” said Bryan Junus, chief analyst for The Corporate Citizenship Project.

“It is puzzling that ESG ratings firms have taken such a skeptical view of it. Viewed in tandem with the recent decision by S&P to delist green energy company Tesla from their ESG index—we question whether the ESG industry is more committed to the environment or more committed to buzzwords and political posturing.”