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Climate Assets monthly update: Nuclear is coming home

Date: 25 April 2022

I might be stating the obvious, but it seems that geopolitics is currently the number one risk for investors. In addition, so far this year markets have contended with multiple unknowns and areas of risk, including supply chain disruptions, price and wage inflation, a shortage of skilled labour and interest rate hikes. As a result, these concerns have underpinned a market leadership rotation from growth to value, a well-known headwind to our Climate Assets strategy.

As I met with clients and advisers this quarter to review portfolio changes and discuss our outlook, questions have focused on two areas: shifting our investment strategy and nuclear power.

For a long-term investor with a solid performance track record, diverting from our tried-and-tested investment process is not the solution to a short-term headwind. We have always acknowledged that there will be times that our approach is ‘out of favour’. A style shift will betray not just our investment philosophy but also our shareholders’ expectations, not to mention the fact that it would incur unnecessary costs. We remain committed to investing in companies providing the solutions to the economic and environmental issues of climate change and population growth. These companies have delivered consistent growth with strong pricing power so far, and we believe that they will continue to be well positioned in an environment of lower growth and inflationary pressures.

We still believe the investment cycle has further to run

We still believe the investment cycle has further to run and, in the absence of an escalation of the Ukraine situation, we expect modest single-digit corporate profit growth this year. Forward-looking valuation multiples have eased since the start of the year and outside the US they are currently below their 10-year averages. With bond yields still normalising, we remain modestly optimistic about the prospects for equities and believe that there are pockets of opportunity within selected investment themes, namely decarbonising the economy and energy efficiency.

In response to soaring global energy prices, the UK government has published the long-awaited Energy Security Strategy (ESS). There are no surprises on the strategic aim, as making energy ‘cleaner, more affordable and more secure’ is the underlying premise of many other governments’ energy policies.

In the shift to net zero by 2050, there is a clear recognition that we will need to rely on some ‘British’ fossil fuels.

Thus, there is support for domestic oil and gas production in the near-term as the UK seeks to pivot away from Russian oil and gas imports. A new licensing round for North Sea oil and gas projects will be launched this autumn to promote the UK’s energy security. While the current moratorium on shale gas exploration will remain in place, a technical review will be commissioned to explore the environmental issues caused by fracking in greater detail, such as water supply contamination. 

The strategy also pledges to support the growth of offshore wind and hydrogen, in addition to proclaiming that ‘nuclear is coming home’ and that it will represent c.25% of our projected electricity demand by 2050. 

Disappointing to many, nuclear energy is at the core of the government’s ESS, with an ambition to have up to 24GW of nuclear energy by 2050. A new government body, Great British Nuclear, will be established to oversee the nuclear project pipeline. Whilst most of the existing nuclear capacity would be decommissioned over this decade, both large nuclear plants and small modular reactors will have a critical role to play. It is also likely that nuclear will be included in the UK’s upcoming green taxonomy, to encourage private investment. However, many concerns remain within the scientific and investment community over the safety of nuclear power plants and the disposal of nuclear waste. The UK’s increased support for nuclear power may bring new investment opportunities for our fund in the future in the areas of hazardous waste treatment and energy producer services.

The ESS also addresses wind power, with a focus on offshore and less emphasis on onshore wind, due to NIMBY (not in my back yard) opposition to wind turbines on land.  There is a commitment to significantly increase offshore wind generation, with an ambition to deliver up to 50GW by 2030. This will be supported by reducing approval times for new offshore wind farms from 4 years to 1 year.

The ESS outlines an ambition to increase the hydrogen production target up to 10GW by 2030, with half of this coming from green hydrogen (I.E. generated from renewable electricity). Today, almost all the hydrogen we use is sourced from natural gas (so-called, blue hydrogen). However, a rapid decline in the cost of electrolysis would make ‘green’ hydrogen a commercially viable way of storing excess electricity generated from renewable energy.

Other important areas, like solar energy and heating, lack specific targets in the ESS. We note the ‘Heat Pump Investment Accelerator Competition,’ will take place later this year to encourage heat pump manufacturing in the UK.

It is true that to decarbonise the economy, we need all the tools in the toolbox, including nuclear and some fossil fuels. However, we are disappointed by the issue of new licenses for North Sea oil and gas projects and the lack of ambition to boost energy efficiency in our homes.

On a brighter note, with Easter approaching we can now look forward to longer days, warmer weather and turning off the central heating.

Lastly, we have an upcoming event for you to add to your diaries. Please feel free to join the team and I for our Quilter Cheviot Live event on the 26th May where, for the first time, Quilter Cheviot will host a live event as part of our Investing in Tomorrow’s World series. We will be joined by special guest Lucy Siegle (The Guardian, BBC, and author) to discuss how we can lessen our environmental impact and be a better friend to our planet. You can register for the event now – we look forward to seeing you there.

Author

Claudia Quiroz

Executive Director & Head of Sustainable Investment

I lead the sustainable investment team at Quilter Cheviot, dedicated to serve clients who would like to invest in companies offering solutions to the economic and environmental problems of urbanisation, climate change and resource scarcity.

Climate Assets Fund

The Climate Asset Fund invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.
Find out more about Climate Assets Fund

The value of your investments and the income from them can fall and you may not recover what you invested.