Split over atoms
Nina Röhrbein finds few pension funds have specific policies on nuclear, and reports differing views among funds and managers
As the two-year anniversary of the Fukushima nuclear disaster approaches, Germany is sticking to its policy to phase out nuclear power. But China has recently begun to restart its nuclear power programme after a temporary halt caused by the accident in Japan.
Like the different views held by various governments, there are various attitudes towards nuclear power among ESG investors.
Nuclear experienced a significant renaissance after 2008 when energy prices, particularly oil, started to spike significantly. But when the accident happened in March 2011, there was a change in approach worldwide.
“Fukushima did not kill the nuclear industry – there is still quite a lot of scope for growth, particularly in China,” says Charlie Thomas, fund manager of the Jupiter Ecology Fund.
Nuclear power has traditionally been a big concern for retail investors. It is often one of the issues screened out in ethical funds alongside alcohol, weapons and pornography.
“The majority of institutional investors, with the exception of maybe church pension funds and charities, do not generally screen out sectors,” says Aled Jones, European head of responsible investment at consultancy Mercer. “With the ESG momentum shifting towards integration and engagement, there has been a further move away from screening practices.”
There are three main risks with nuclear energy – the risk of an accident like Fukushima and its wider economic and financial repercussions, proliferation where people may develop nuclear technology with a view to developing weapons, and safety concerns around waste.
Some retail and institutional funds, such as Jupiter Asset Management’s Ecology fund, have a 10% threshold on nuclear power; in other words they cannot invest in any companies that derive more than 10% of their revenues from nuclear power generation.
“Many of our investors still have genuine concerns over nuclear power, mainly due to accidents such Three Mile Island, Chernobyl and Fukushima,” says Thomas. “But people have become much more progressive around nuclear, recognising that it is likely to form part of the low-carbon environment going forward. Overall the argument has become more balanced and new mandates increasingly put less emphasis on nuclear power as a straight negative exclusion.”
Few pension funds have specific policies on nuclear. They are more likely to have broader ESG policies that might make a reference to risks, including nuclear. “The majority of pension funds do not even have an explicit ESG policy with separate or detailed wording – most of them still make short references to it in their statement of investment principles,” says Jones.
There are two main ways to invest in nuclear – through utilities operating nuclear power stations and through industrial equipment companies. One of the better known nuclear power plant operators is EDF, while industrial companies include Areva, Toshiba/Westinghouse and General Electric.
Jupiter’s Ecology Fund has taken advantage of investment opportunities resulting from the decommissioning of old plants.
“We already have a $73-74bn (€55-56bn) bill for decommissioning nuclear power stations in the UK, and this figure is expected to rise,” says Thomas. “That means there are companies that advise the nuclear authorities on how to decommission and carry out that decommissioning. For a fund seeking to invest in environmental solutions, that is a sizeable and attractive market so, ironically, we can play nuclear by dealing with its legacy and clean-up.”
In general, the influence of governments in the countries of origin of investors cannot be overlooked.
In line with the French government’s on-going support for nuclear energy, the board of the country’s public servants’ pension fund, ERAFP, has always maintained that it would not exclude nuclear from its investments a priori.
ERAFP, which is a 100% socially responsible investor, has exposure to nuclear, notably through its investments in listed equities, via companies such as EDF. It is also indirectly exposed through its investments in domestic government bonds, as France is one of the world’s main nuclear power producers.
In implementing its responsible investment policy, ERAFP assesses issuers on a wide range of ESG criteria split between five big domains – one of which is the environment – before choosing investments on best-in-class principles. ERAFP’s ESG criteria are based on international standards such as ILO conventions, OECD guidelines and UN principles, and at present no international conventions prohibit nuclear power.
“However, we use a lot of criteria to ensure that companies involved in the production or use of nuclear power do this with the appropriate guarantees and safety procedures,” says Oliver Bonnet, head of SRI at ERAFP. “For example, occupational health and safety as well as pollution prevention and control are criteria that we apply to all the companies in the utilities sector. Due to its lack of transparency, we have never invested in Tokyo Electric Power Company (Tepco). And if the French government did not provide us with guarantees that the risks regarding, for example, nuclear waste management were adequately handled, we would not invest in its bonds either.”
The Zurich-based collective foundation Nest is neither invested in nuclear power plants nor in technologies serving to build or maintain nuclear power production – meaning 83 companies involved in the sector are screened out.
“The issue is twofold,” says Christoph Müller, president of the investment committee of Zurich-based investment advisory FourA, which advises Nest. “Nuclear power generation is related to immeasurable risks for society as a whole because of the threat of severe accidents and because it is not as cost-efficient as other forms of energy. Some of its costs, such as waste storage and decommissioning of existing plants, and the financial consequences of large-scale nuclear accidents are not covered by the balance sheets of the likes of Tepco, and Nest is not willing to carry this financial risk.”
Nest also screens out weapons, human rights violations, genetic engineering, alcohol and tobacco. So, based on its exclusion criteria, one-third of the MSCI World is not investable, with another third of the universe dropping out due to bad scores on factors such as climate change.
As a result, Nest’s portfolio managers have to control the tracking error, which may be reduced to the usual level for an active portfolio, in other words less than 2%. That level is still relatively high, although Müller stresses that the exclusions have neither negatively nor positively influenced Nest’s returns.
The Swiss sustainability specialist SAM does not invest in nuclear plant-operating utilities, industrial companies where the dominant part of their revenue comes from nuclear or uranium mining companies, mainly because it deems the risk-return profile of those companies as unfavourable.
“The economics for nuclear in western countries do not work anymore,” says Thiemo Lang, senior portfolio manager of SAM’s Smart Energy fund. “Due to additional safety requirements, the inflation-adjusted costs of nuclear power stations have increased two to three times over the last 30 years. Without any government-backed loans, it is no longer possible for western utilities to start investing in nuclear capacity because on the free capital market no bank will lend the money for new nuclear projects and no insurer is willing to insure against the risks. With two-thirds of the worldwide new capacity being built in China, nuclear power generation has become a truly emerging market subject where the economics are more favourable.”
In addition, Lang points out that nuclear only contributes 5% to primary energy consumption, and market projections forecast that the share of nuclear in the global energy mix will not increase, as worldwide energy consumption is set to increase by 50% over the next 25 years.
“Therefore, nuclear has neither played a meaningful role in containing CO2 emissions in the past nor will it do so in the future, especially as many nuclear power plants are slowly reaching the end of their lifetime,” says Lang. “There are better ways to reduce CO2 emissions, including energy efficiency and renewable energy. The efficiency of old coal-fired power stations in China, for example, can be nearly doubled with state-of-the-art technologies.”
Thomas, however, believes that nuclear power can be cost-competitive with other forms of power generation on a total lifecycle basis although, he admits, its competitiveness is driven by fossil fuel pricing.