ESG investing is on the rise among investors, with climate change being a key impact area of focus. For many investors, expressing this conviction means excluding so-called sin stocks from their portfolios. But that might be easier said than done as some themes deemed ethically questionable fall into a grey area. A case in point: nuclear energy.
“The asset management industry … must end the practice of excluding nuclear energy from ESG and SRI mandates,” wrote Michael Edesess, chief investment strategist of Compendium Finance and adjunct associate professor at the Hong Kong University of Science and Technology, in a note published on Advisor Perspectives.
Edesess noted that the scientific-environmental community originally embraced nuclear power as a promising alternative to large hydroelectric dams, whose construction came with significant habitat destruction. But that stance was reversed later on as a fear of radioactive fallout from atomic bomb testing gave rise to a fear of radioactive emissions from nuclear power plants.
“Fear of nuclear radiation was entirely rational when little was known about its effects,” he said. One factor underpinning the fear was the linear-no-threshold (LNT) assumption, which held that the percentage of a population dying from nuclear radiation would be proportional to the dose, and that there’s no threshold below which it wouldn’t kill anyone.
“Research since that time … has shown that the LNT hypothesis is false,” Edesess said. Based on studies that include research on those affected by the Hiroshima and Nagasaki bombings, scientists have found that low radiation levels in the range of 100-200 millisieverts appear to cause no deaths. Work following disasters in Fukushima and Chernobyl also indicates cancer incidences that are much lower than suggested by the LNT assumption.
Despite these findings, the idea of nuclear energy still faces significant opposition. While nuclear plants emit no greenhouse gases during operation, critics say constructing them still requires the emission of such gases. But the same can be said for wind turbines and solar arrays, Edesess noted.
He also pointed to a “double-whammy” that left a deep scar on the public perception of nuclear energy. The China Syndrome, a thriller that depicted “drastic, virtually unstoppable, and inexorably disastrous consequences” from a nuclear power plant accident, was released on March 16, 1979. That was just 12 days before the infamous accident at Three Mile Island, which Edesess said was disastrous and very costly to the plant and its owners, but resulted in no injuries or fatalities.
Because of the persistent and overwhelming anti-nuclear sentiment, he said, companies involved with nuclear energy often get categorically excluded from funds that carry the ESG or SRI label. He said Jon Hale, Morningstar’s Global Head of Sustainability Research, informed him that traditional SRI funds often excluded nuclear from their mandates.
But things might be changing. One paper jointly authored by Morningstar and Sustainalytics titled Nuclear Energy and ESG: Can They Play Together noted that “[m]arket underappreciates nuclear’s positive ESG attributes.” Emerging low-carbon designations, Edesess added, should not a priori exclude nuclear, the most powerful zero-carbon-emitting energy technology.
“If ESG funds and their sponsors stop excluding nuclear energy and start to include it as a positive feature of an ESG / SRI portfolio, it is likely to significantly change the consensus toward public acceptance of nuclear power as an essential component of the fight against climate change,” he said.
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