Full steam ahead for nuclear green bonds

IFR 2512 - 02 Dec 2023 - 08 Dec 2023
7 min read
Americas, EMEA
Julian Lewis

Nuclear green bonds have finally ignited with Canada becoming the first sovereign borrower to add the emissions-free energy source to a green financing framework and EDF seeing hefty oversubscription for its inaugural international issue with a nuclear use of proceeds. The once controversial ESG product now seems set for take-off, though it is unclear whether a prominent green bond index will continue to exclude it.

“It's a really great time, with all of [the issuers] being able to get recognition externally that nuclear is a key part of the energy transition,” said Jonathan Hackett, head of sustainable finance and co-head of the energy transition group at Bank of Montreal.

Bellwether corporate green issuer EDF’s landmark deal last week “should create a strong precedent for repeat transactions in this format in Europe, building on a range of supply already seen [in Canada]”, said Arthur Krebbers, head of corporate climate and ESG capital markets at NatWest.

Hackett pointed to “a continuous trajectory over the last five years” towards nuclear green bonds. This includes issues in 2021 from Canadian utilities Bruce Power and Ontario Power Generation and EDF’s inclusion last year of the category in its framework.

Moves have accelerated this year. In June Finnish nuclear power company Teollisuuden Voima established a green bond framework that includes nuclear power.

Bankers have also reported greater receptiveness from some previously sceptical European investors.

November momentum

Momentum has increased further in recent weeks through two heavyweight issuers. The framework for Japan’s “climate transition bonds” – the first sovereign transition instrument that is set for launch in February – showed “next-generation innovative reactors” as one of eight uses of proceeds.

Credit Agricole has also added nuclear to its green bond framework. This allows it to lend to nuclear projects in three areas that meet the “substantial contribution criteria” of the EU Taxonomy of sustainable activities: pre-commercial stages of advanced technologies; construction and operation of new plants; and electricity generation from existing installations.

Two second-party opinion providers, ISS ESG and Sustainalytics, each affirmed for the first time that nuclear use of proceeds aligns with ICMA's Green Bond Principles. Cicero Shades of Green, part of S&P, rated the Bruce Power and OPG issues as “medium green” in landmark opinions and gave the same rating to EDF’s revised framework in July 2022.

“Nuclear energy brings some challenges, but it is a decarbonised form of power and we assess it as such in our second-party opinions. But we don’t automatically give a green shade,” said Christa Clapp, managing director for sustainable finance at S&P and co-founder of Shades of Green, citing checks on mitigation of risks.

ISS ESG’s SPO for Credit Agricole added the qualification that in its view, nuclear is an "obstruction" to UN Sustainable Development Goals 7 and 15 (“Affordable and Clean Energy” and “Life on Earth”, respectively) while contributing to SDG 13 (“Climate Action”).

Taxonomy trigger

The new moves flow from the EU’s hard-fought agreement in July 2022 to include nuclear power in its taxonomy. Canada cited this in the update to its framework, launched originally in March 2022.

Now the sovereign may finance several types of nuclear expenditure through green bonds, such as investments in new reactors; refurbishment of existing facilities; research and development; and “some” investments in its nuclear supply chain.

Canada has committed to use no proceeds from its oversubscribed C$5bn (US$3.7bn) debut green bond for nuclear expenditure. The sovereign will issue a second bond under the updated framework “before the end of this fiscal year [in March]”, the debt management office said.

Hackett welcomed the sovereign’s move. “This gives a signpost to investors that this is an enduring commitment and reflects the importance of it in driving decarbonisation," he said.

Although EDF added nuclear (where its annual capital and operating expenditure is nearly €8bn) to its framework within days of EU Taxonomy inclusion, none of its subsequent US$1.75bn-equivalent of green bonds had a nuclear use of proceeds, LSEG data show – though it did launch the first nuclear green loan.

But when it finally emerged on Tuesday, the renationalised utility’s first nuclear green bond due June 2027 drew orders of as much as €3.3bn. This enabled bookrunners Credit Agricole, ING, Mizuho, Santander and UniCredit to tighten the launch spread by more than 30bp to 73bp over mid-swaps and increase the deal to €1bn from an indicated €750m.

“EDF has been extremely well received,” said the head of DCM at one lead manager, pointing to the deal’s “top quality” investors and 5bp new issue premium.

Thomas Coudert, head of fixed-income sustainability at Axa Investment Managers, welcomed EDF’s identification of the projects financed by its green bonds as best practice. The fund manager will consider nuclear green bonds for “other strategies”, though it takes a “conservative” stance of excluding them from its dedicated green bond strategies.

Nachu Chockalingam, senior credit portfolio manager at Federated Hermes, said: “Whether they are green bonds or nuclear bonds, the disclosure of EDF is pushing other companies to do the same, which is a step forward for this labelled bond phenomenon."

Index doubts

With the nuclear green outlook positive, two major European sovereigns with strong commitments to the energy source stand out as obvious issuer candidates but neither France nor the UK would confirm plans to add it to their green bond programmes.

"At the moment, green OATs are omitted according to the 2017 framework document that excludes nuclear expenditure," said an Agence France Tresor spokeswoman.

“The UK government does not finance any nuclear energy-related expenditures under the framework. That said, the government does not rule out the possibility that the framework may be revised at some point in the future,” said a UK Debt Management Office spokesperson, who noted that nuclear power is a “key part” of the country’s low-carbon energy mix.

Nuclear-sceptical Germany was adamant, however. “Nuclear expenditures remain excluded from our green bond framework,” a Deutsche Finanzagentur spokeswoman said.

The influential Bloomberg MSCI green bond index has long refused to include the instrument, despite Bloomberg no longer adding a white flag to nuclear green bonds in its system. In June, MSCI attributed this to a “more stringent” methodology than the Green Bond Principles and Green Loan Principles.

It is unclear if the new nuclear green momentum has had any impact on this stance.

Additional reporting by Jihye Hwang and Sudip Roy