The long wait for Europe’s first nuclear green bond goes on despite the European Union having confirmed the emissions-free energy source in its taxonomy of sustainable activities a year ago and the instrument gaining increasing traction in Canada.
Hungarian utility MVM, which generates more than half its electricity from nuclear facilities, quietly ruled it out of its new financing framework under which it issued its first green bond on Thursday.
The document explicitly excludes fossil fuel projects, which account for some 40% of generation, but is silent on nuclear. However, sources affirm that MVM's green bonds will have no nuclear use of proceeds, including maintenance capex or grid interconnections.
The move comes with France’s EDF – operator of Europe’s largest nuclear fleet, and almost 80% of its generation from this source, and a leading issuer of green bonds to finance its renewables expenditure – having yet to launch its inaugural nuclear green bond.
The state-owned company updated its green financing framework to include nuclear immediately after the power source's controversial inclusion in the EU Taxonomy went through in July. Cicero Shades of Green gave the new use of proceeds its “medium green” rating.
EDF later prepared the ground by issuing the first green loan for nuclear.
Its Sizewell C nuclear plant operator in the UK has also not launched a green or other ESG bond its finance director anticipated bringing “in the first months of 2023”.
At the same time, other largely or full nuclear utility operators such as Finland’s TVO continue not to label their bonds.
Investor reluctance
On the face of it, nuclear should be a significant source of green bond financing. “It's low carbon. So we count any green bonds for nuclear, and in our climate-aligned universe we include nuclear bonds,” said Sean Kidney, chief executive at the Climate Bonds Initiative, though the NGO does not certify these issues.
Operators are due to add nearly 100GW of net new nuclear capacity globally over the next two decades while shutting down older plants, according to the International Energy Agency.
The IEA’s net-zero scenario assumes a doubling of nuclear capacity by 2050, with small modular reactors forming part of new technologies’ contribution to halve emissions over the period.
“Nuclear energy as validated by the EU Taxonomy certainly has the potential to be a meaningful part of the European and indeed Asian and American green bond market, noting the meaningful investment plans in this area,” said Arthur Krebbers, head of corporate climate and ESG capital markets at NatWest.
But many European investors and asset owners are still reluctant to take exposure to the sector. Mandates from pension funds and endowments often specifically exclude nuclear, and older responsible investment funds (some set up after the 1986 Chernobyl nuclear disaster) have nuclear exclusion “hard-coded”, as one fund manager put it.
“Even if there is a green bond which is EU Taxonomy-aligned and the taxonomy allows nuclear, it would dampen the demand,” said Jarek Olszowka, head of sustainable finance at Nomura. “The moment you include nuclear despite that it's taxonomy-aligned, you're going to lose a chunk of the buyer base.”
Moreover, MSCI excludes nuclear instruments from the prominent green bond index it compiles with Bloomberg. This is due to what it terms a “more stringent” methodology than the Green Bond and Loan Principles.
Against this background Krebbers said there is “nervousness” among issuers over being the first mover in Europe.
This stance led to MVM’s decision, according to bankers. “It was thought it wouldn't be helpful from a marketing perspective,” said a banker at one of the lead managers. “There are a number of investors that don't agree with the EU Taxonomy and there's still meaningful sensitivity to nuclear when it comes to green.”
NatWest plans to survey investors and examine fund flows to gauge whether anecdotal evidence of better sentiment towards nuclear since the Ukraine war is borne out.
Nuclear remains a highly contested issue politically. Even after its inclusion in the taxonomy, some members of the European Parliament sought to exclude it from the EU Green Bond Standard. After this effort failed, they sought a requirement for a health warning in red capital letters on the front page of any nuclear green bond.
In addition, a group of NGOs resigned from the European Commission’s advisory Platform on Sustainable Finance and recently sued the Commission at the European Court of Justice over nuclear's taxonomy inclusion.
“I don’t see this debate ending,” said Olszowka, who advises issuers seeking to maximise the investor base for their green issues to finance nuclear activities separately.
“Just because nuclear is being included in the EU Taxonomy doesn’t mean that it has to come with an ESG label,” said a banker on TVO’s recent unlabelled bond.
“Issuers have to be very mindful of how they are perceived if they are operating in a more controversial sector, as printing ESG bonds could simply end up in prompting more questions around their new issue among investors.”
Signs of change
Even so, change may be on the way. Some investors queried the recent TVO deal for not being in green format, according to banks involved.
Moreover, Finnish utility Fortum is “planning to have sustainable bonds at some point in the future”, according to Rauno Tiihonen, its investor relations manager. The company, which produces nuclear power, is establishing a broad sustainable financing framework that will include green bonds.
But with market conditions remaining challenging and companies focused on access to liquidity, Europe may still not see its landmark first nuclear green bond this year. Instead Krebbers anticipates further private nuclear green financing, either through loans or private placements, as “more straightforward”.
“It's not unusual for more innovative structures and more focused labels to first emerge in that market because you don't have to convince 100 investors – just three or four,” a banker said.