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What place for nuclear energy and natural gas in ESG investment?

ESG Investments

The Sustainable Finance Taxonomy

The European Union appears to be split on the energy content of the Sustainable Finance Taxonomy. The Taxonomy which took effect in July 2020 takes the form of a classification system of environmentally sustainable economic activities. Its function is to help to implement the European Green Deal by steering investment towards sustainable projects and activities.

Late on New Year’s Eve, 2021, the European Commission announced that both nuclear energy and natural gas would be included in draft sustainable finance legislation. Perhaps the timing of the release hints at a degree of trepidation regarding the likely controversy of the policy decision.

Member states of the EU are split on the nature and role of these energy options. Germany provides a good example. Having made the decision to phase out nuclear energy production in 2011, within days of the Fukushima nuclear incident, Germany is heavily reliant on natural gas and has advocated its role in the sustainable transition away from greater carbon-emitting sources such as coal-fired power. So Germany, along with Austria, would oppose the inclusion of nuclear, whereas France, with a strong interest in and dependence on the nuclear sector would support its inclusion, at the very least on a transitional basis.

The European Commission has stressed the transitional nature of both energy sources, stating in a press release accompanying the announcement:

“Taking account of scientific advice and current technological progress, as well as varying transition challenges across member states, the Commission considers there is a role for natural gas and nuclear as a means to facilitate the transition toward a predominantly renewable-based future,”

The irony of this debate is that one aim of the taxonomy is to combat greenwashing by agreeing on investments that can be considered as sustainable, yet Robert Habeck, co-leader of the German Green Party, used exactly this label to describe the proposed inclusion of nuclear and natural gas in the taxonomy.

Nuclear energy

The debate is unsurprising, not only has the investment community lacked a uniform stance on nuclear energy but so too have environmental groups, given its low carbon capacity for electricity production. James Lovelock, for example, has for some time advocated the role of nuclear in delivering low carbon energy in significant volume and without problems of intermittent supply. Those opposing the expansion of nuclear refer to a number of factors in arguing why it should not be seen as a sustainable option. These include:

  1. The high cost of nuclear infrastructure when compared to renewables such as wind  or solar;
  2. The long lead time needed to develop nuclear power stations while climate action is urgent;
  3. The lack of safe and secure options for the management of nuclear waste;
  4. The widespread impact on human health and the environment of nuclear disasters which have occurred over time.

Whichever side of this debate one takes, what is clear is that, given the growth of ESG investment, inclusion in the Taxonomy is likely to open up access to finance for nuclear new build, which may in the future be based upon small modular reactors rather than large scale plants. It is readily understandable, then, why France should support nuclear energy’s inclusion, given the prominent role of the largely state owned Electricité de France SA (EDF) in nuclear development including at Flamanville in France and Hinkley Point in the UK.

Natural gas

The inclusion of natural gas is arguably less controversial in that one might envision phase out of natural gas at an earlier point than at the end of life of a nuclear power station opening at this point in time. Present pressures in the gas market and rapidly escalating consumer prices may generate support for inclusion. Yet green NGOs would argue that supporting gas competes with further investment in renewable energy and that inclusion of fossil fuel as a sustainable solution seems a contradiction in terms in the face of a climate emergency.

For gas (and indeed for nuclear) what might matter is the conditions attaching to investment. For example, can investment in gas be proven to be displacing coal-fired generation and will there be conditions as to gas emission limits? Again this is an area of controversy, quite independently of any debate about investment. Shell announced in late 2021 that it would pull out of involvement in the North Sea Cambo oil and gas field off the Shetland Isles citing potential delays to development and a weak investment case. The delay factor here might refer in part to the threat by Greenpeace to take legal action against the UK Government’s decision to allow new drilling in the North Sea.

At the same time climate activists in Norway, having failed in the Norwegian Supreme Court to establish that granting of new licences to drill in the North Sea might constitute a breach of Articles 2 (Right to Life) and 8 (Right to Family Life) of the European Convention on Human Rights, have pursued the case to the European Court of Human Rights. Norway has until mid-April to respond to the Strasbourg Court on the merits of the application.

What do we learn from all of this?

There are increasing calls for standardised approaches and transparent data to support ESG investment. The Sustainable Finance Taxonomy is a welcome Europe-wide response to such pleas. We see, however, that determining what amounts to sustainable action, environmentally, socially and in terms of good governance is not easy to decide. In a sense, the development of the Taxonomy is welcome in providing a platform for this debate and this becomes clear when we look at the steps ahead.

There will now follow consultations and discussions with Member States once a final draft text is resolved. In due course, both the European Parliament and the Council of Ministers will need to agree the text. Debate in the Parliament is likely to be heated. Already, however, we discern positions being taken by Member States that reflect national interests rather more than concerns about the sustainability of energy solutions under climate pressures. Given the capacity of the Taxonomy to direct huge flows of investment to drive green transitions, we must hope for a mature, wide-ranging, and magnanimous debate.

A personal reflection by Professor Robert Lee

Professor Lee is Head of the Law School and the Director of the Centre for Legal Education and Research at the University of Birmingham. He is one of the UK’s most respected environmental academics and commentators.

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