Nuclear Energy: Strategic building block to a sustainable future?

The first half of the year in the nuclear industry was not for the faint of heart. Shortly after the start of the war in Ukraine, the Vontobel Nuclear Energy Index experienced an enormous upswing driven by uncertainties regarding energy supplies. This overreaction has been corrected since then, but the long-term investment case should remain. Countries around the world emphasize the importance of nuclear power as a stable and clean energy source and put their money where their mouth is.

The recent decision of the European Commission to label nuclear power as “green” demonstrates the dedication of the European Union to further develop the nuclear energy and achieve greater energy independence from Russia.

Unlike the popular use of ‘green energy’, in the context of EU taxonomy, green energy is not equivalent to renewable energy. Rather, an economic activity must meet the criteria of the EU taxonomy to be considered green or sustainable. The EU taxonomy is a classification system that lists a set of sustainable economic activities. It helps to establish an official opinion and a common language of what sustainable means and is supposed to protect private investors from greenwashing.

According to the taxonomy, only activities that make a significant contribution to one or more of the following six environmental goals should be defined as green:
1. Climate change mitigation;
2. Climate change adaptation;
3. The sustainable use and protection of water and marine resources;
4. The transition to a circular economy;
5. Pollution prevention and control;
6. The protection and restoration of biodiversity and ecosystems.

Regulatory environment becomes favorable for nuclear energy development

To achieve the EU's 2030 climate and energy targets and meet the objectives of the European Green Deal, the EU taxonomy is a crucial tool to channel investments into sustainable ventures and practices.

After the Commission approved it on 2 February 2022, specific nuclear and gas energy activities will be added to the list of economic activities covered by the EU taxonomy, the decision was again confirmed when a motion to oppose inclusion of nuclear as environmentally sustainable economic activities was rejected on Wednesday last week, 6 July 2022. The vote on Wednesday shows again that the EU wants to encourage investments in the nuclear industry to accelerate the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future.
The chart below illustrates why nuclear energy is an important building block for a sustainable future. On a life-cycle basis, nuclear power emits similar amounts of CO2 as wind power, and less than all types of solar energy.

The classification as green opens the door to an entirely new pool of sustainably managed assets from which private investors can also benefit.

The tide has turned: Countries around the world recognize the need for nuclear power

Europe is not the only region baking on nuclear power. At the UN climate change conference (COP26) in 2021, China, the world leader in solar, wind and hydro power generation, announced to build 150 new reactors until 2035. A tremendous investment of approximately 440bn USD that will push China forward in their goal to transition from a coal-intensive economy to carbon neutral one. The magnitude of China’s investment in 150 new reactors is put into perspective when it is considered that there are currently 440 reactors operating around the world. Unlike renewables, nuclear energy provides continuous electricity that can be adjusted to demand. The fact that the world leader in renewables clearly sees these benefits of nuclear power sends a strong signal and confirms what many believe to be the winning team: nuclear and renewables.

Even the USA, that currently operates the largest fleet with 93 reactors, is further investing in nuclear power. It has currently two reactors under construction and the Biden administration launched a 6 bn USD program to keep current reactors operating just last month. Furthermore, the USA expects to invest 600 million USD in the examination of the potential for small modular reactors (SMRs) and advanced nuclear reactors.

In the years to come, investors can benefit from the need to reduce CO2 and the trend towards energy self-sufficiency by investing in the entire nuclear energy production life cycle, i.e. from mining to power generation. In this context, the exposure to the nuclear energy industry provided by the Vontobel Nuclear Energy Index could be of interest for investors who are willing to participate in this accelerating trend and to accept the market risk from the investment. The index is calculated in US dollars and charges a fee of 1.25% p.a. Investors in the tracker certificate linked to the index bear the credit risk of the issuer (Vontobel).