Green nuclear bonds: The new kid on the block

EU Taxonomy opens up new opportunities

The role of nuclear energy has been the subject of heated debate in Europe for decades. Against the backdrop of recent geopolitical tensions and the concurrent goals of security of supply, decarbonization, and affordability, numerous European countries are reevaluating their stance on nuclear power. With the conditional classification of certain nuclear activities as sustainable under the EU Taxonomy, a regulatory framework for green financing of nuclear projects has been established. This opens up new opportunities for issuers and investors.

The first European utility companies have adjusted their sustainable financing frameworks to allow them to explicitly use the proceeds from green bonds for qualifying nuclear power projects. However, so far only the French nuclear power plant operator EDF has issued such green nuclear bonds, thereby establishing a new segment within the green corporate bond market. Although its volume is still relatively modest at present, its significance is likely to grow in the coming years.

In this report, we used EDF’s green bonds to examine how the risk premiums on green nuclear bonds behave compare to those on green non-nuclear bonds, i.e., green bonds with traditional use of proceeds for renewable energy. The analysis shows that there is no or a negative nuclear greenium, meaning no spread advantage for green nuclear bonds. We see the polarized perception of nuclear energy among investors as the main reason for this – despite its (conditional) legitimization under the EU Taxonomy. Many funds continue to categorically exclude nuclear power from their investment strategies. Lower demand for green nuclear bonds is reflected in higher spreads. At the same time, this means a possible additional yield with comparable credit risk for investors who accept nuclear power in their portfolios in accordance with the EU Taxonomy.

In addition, investors are protected against greenwashing, as the requirements for green nuclear bonds are very strict. The default risk is also likely to be limited because the use of nuclear power is a strategic decision made by governments, and thus operators of nuclear power plants and potential issuers of green nuclear bonds, respectively, generally enjoy strong government support. Last but not least, funds with sustainability characteristics under Articles 8 and 9 of the SFDR can increase their taxonomy-aligned investment share by investing in green nuclear bonds. The same applies to issuers with regard to their taxonomy-compliant CapEx share.

Despite controversial views on nuclear power, we believe EDF’s green nuclear bonds serve as a signal, as they demonstrate that the regulatory approval of nuclear energy can be successfully translated into marketable financing instruments.

Download The Full Credit Markets Special