• William Bourne


Gas and fuel shortages over the past few weeks have brought into focus some of the downside of taking precipitate action on climate change. Investing institutions have found themselves underperforming as the price of gas and oil has continued to climb. More importantly, in the real world the shortage of energy has led to disruption – and indeed blackouts - in countries from the Lebanon to China. Not to mention the U.K., where the problem is primarily incompetent planning over the decades.

The first lesson to draw is that old technology energy is going to be needed to bridge the transition to a low-carbon world. It has become clear that, however much we dislike it, there is not yet sufficiently reliable renewable energy generation to keep the world’s economies going until we can go carbon-free. Lack of infrastructure to get the energy where it is needed is a second, equally important, problem.

There are really four main choices for the world here. Building nuclear power stations is cleaner, cheaper at the margin, but has a heavy up-front cost and some nasty tail risks.

Investing in new, or extracting the maximum out of existing, gas fields slows down the transition to low-carbon, but the infrastructure is largely in place and so it is easy to bring on stream.

The third choice is not to invest at all, which is the direction we are being pressurised towards by climate change activists. The result is that nations desperate for energy are turning to old and dirty energy and, in particular, coal. Even countries like Germany, let alone China and India, are opening up old coal-powered stations to provide their population and industry with energy. This has to be a step backwards in every sense.

The final choice is to reduce demand for energy through more efficient use or abandoning some of the utilities the modern world has become accustomed to. It may be feasible, if politically unpopular, for western economies to switch to a lower standard of living, but it is simply not possible for those in emerging countries with aspirations for better lifestyles.

None of the first three choices will meet the highest ideals of ‘greenness’. But it is necessary to choose one of them if we are to keep the lights on. Doing nothing (i.e. refusing to help finance the bridging of the transition) may give a virtuous signal, but will end up in a slower transition as nations are forced to turn to even older technology to keep their economies and societies afloat.

The choice is between making short-term investment in fossil fuels and nuclear power. Financial comparisons are odious because of the assumptions involved. Lazards* made a brave attempt last year, and I use their numbers here. The marginal cost of existing generation on an unsubsidised basis is $23-32 per megawatt hour for gas (combined cycle) and $25-$32 for nuclear, so very comparable.

However, the capital cost of nuclear power is several multiples higher at around $10,000 per megawatt hour, compared to $1,000 for gas. It also involves a lot of pouring of concrete, with consequent carbon emissions. The flipside of that is that nuclear power has far lower greenhouse gas emissions at the point of operation and is more reliable.

I find it challenging when fund managers announce blanket exclusions of fossil fuels or nuclear power. It is fine in my view to divest from individual companies for financial reasons. It is beneficial that investors engage with management and be quite prepared to divest from those who are not willing or able to prepare for a much lower carbon world. However, it is a different matter when the financial system is cutting off capital from an industry – whether nuclear or gas – which the world still needs. I would argue that is almost inconsistent with the S of ESG - the obligation to use money in a socially responsible way.

I find exclusion of nuclear power generation especially hard to understand. When challenged, managers talk about the risks of storing the spent fuel and the lack of an exit (or alternative use) for a nuclear power station. Put another way, this is the cost of decommissioning. Both of those are valid points, but they equally have to be balanced against both the financial and the ecological benefits of a supply of clean fuel. It is noteworthy that France, which has embraced nuclear power, has the lowest cost of electricity to both consumers and industrial users in the world, and is one of the greener nations. I do not make the case that investors should invest in nuclear power; simply that they should not exclude it.

Maybe it comes down to objectives. When fund managers add exclusion policies, is their underlying objective to widen the universe of potential investors/head off unwelcome publicity from lobby groups? Is it to signal their green credentials? Or is it to use their money to have a positive impact on the real world? If the latter, I would argue that putting exclusion policies in place is misplaced zeal.

* Lazards’ Levelised Cost of Energy Analysis 14.0 - 2020