The UK's decision to use the proceeds of its upcoming green gilt sale on nuclear energy has emerged as a dealbreaker for Rathbones Asset Management's flagship bond fund.
Bryn Jones, the firm's head of fixed income, told Bloomberg that the Rathbones Ethical Bond Fund -- the biggest of its kind -- won't be participating in this week's planned green gilt syndication.
The UK government's decision to include nuclear energy in the program is "disappointing," Jones said in an interview.
Though the government is unlikely to encounter difficulty in finding buyers for its bonds, Rathbones' red line represents a symbolic blow. The fund offers the largest sterling fixed-income strategy with a sustainable focus, Morningstar Direct data shows.
Britain is planning to move ahead with the sale this week, in what will be its first green gilt launch since 2021. The issuance marks a debut under the UK's updated financing framework, with proceeds free to go to previously off-limits nuclear-energy projects. The Rathbones fund had been a long-time backer of green gilts, with its £1.9 billion ($2.5 billion) fund among the biggest holders of the government's 2053 green bond.
Jones, himself a vocal supporter of the UK's green gilt program until now, said he thinks "there are better ways of achieving net zero that have less risks associated to them" than resorting to nuclear energy.
The Rathbones fund doesn't invest in conventional gilts, meaning it only lends to the UK government via green debt.
Concerns relating to waste disposal, potential weapons proliferation and the risk of accidental radiation give some investors pause when it comes to nuclear energy. It's one of several activities the Rathbones fund won't finance, alongside the manufacture of weapons and predatory lending.
For the UK government, meanwhile, investing in nuclear energy is a key part of its net zero emissions strategy as Britain looks for ways to wean itself off volatile gas markets. Last year, Electricite de France SA, the French energy firm, persuaded the British government and investors to build another nuclear power plant for £38 billion.
A UK Treasury spokesperson said that nuclear energy was "pivotal" to delivering "energy security" for the UK.
The decision "helps unlock a golden age of nuclear energy, securing thousands of good, skilled jobs and billions in investment whilst ending our reliance on volatile fossil fuels," they said in reference to the new green financing framework.
In the European Union, nuclear energy is included in the bloc's green taxonomy, which has helped boost green investor willingness to finance nuclear projects that would have struggled to get funding as recently as five years ago.
Yet skepticism remains. Rosl Veltmeijer, who manages the Triodos Sterling Bond Impact Fund, said the inclusion of nuclear energy in the UK's new framework is a "serious concern for us." She has approached the government for more information about its plans, and won't buy the new green gilt for the time being.
Jones at Rathbones said he was dismayed at what he characterized as the government's failure to consult with investment firms on the question of whether nuclear energy should be added to the UK's list of eligible green expenditures.
"We felt there was a lack of engagement with the buyside," he said. Government officials have "shot themselves in the foot a bit. They can quite easily fund nuclear with normal gilts."
The UK Treasury spokesperson said the decision to add nuclear energy to the green gilt program had "received positive feedback from investors."
If specialist ethical investors stay away from Britain's green gilts, it reduces the government's chances of achieving a lower borrowing cost through such bonds relative to normal debt. And without that so-called greenium, green gilts would be a "symbolic" venture that could end up costing the taxpayer, the previous head of the UK's Debt Management Office has said.
For now, greeniums on government debt have proved relatively small, especially when weighed against the extra costs associated with the impact reports and external reviews needed for green bonds.