Stockholm (NordSIP) – On January 15, Danske Bank Research launched a new ESG report for the Utilities sector in the Nordic region. The report is a response to the growing demand from investors that their funds be managed in an ethical manner. “There is a huge focus on providing green profiles and high ESG compliance among both issuers and investors,” says Jakob Magnussen, Senior Analyst in Danske Bank Fixed Income Credit Research, who is responsible for the report.
The report uses data from Sustainalytics to score the ESG risk based on the ESG exposure and management risks utility companies face in the Nordics. “ESG Exposure Risk” is defined as the level of ESG exposure faced by a firm, largely due to the specific sector and industry it operates. “ESG Management Risk” is a measure of how well the company is mitigating ESG risks and is based on assessment of the company’s governance and risk culture. The Exposure score is measured on a scale from 1-100, where 1 is the best. The Management score is measured on the same scale, but 100 is the best in this case.
The report covers ten factors, including nuclear, hydro, wind, CO2 emissions, fuel source and grid resilience and considers 11 Nordic companies operating in the utilities sector. Fortum, Ørsted, Vattenfall, TVO and Statkraft are identified as the least risky companies. Fortum, Vattenfall and TVO are the most important participants in the nuclear sector, which represents 18%, 36% and 99% of heat and energy generation, respectively.
The Nuclear sector is the second largest source of power (21%) in Scandinavia after hydro (56%), largely thanks to the contributions of Sweden’s eight nuclear power reactors, which provided about 35% of its electricity in 2015 according to the World Nuclear Association. Danske Bank’s report finds that the two main sources of ESG risks from nuclear power plants are spent nuclear fuel handling and nuclear station safety. Given the danger that intrinsically radioactive nuclear waste represents, solutions for handling and disposal of spent nuclear fuel are crucial for the score of utility companies. Danske Bank finds that the Nordic region is very advanced in this respect.
Posiva, a subsidiary of both Fortum and TVO, is leading the way with spent fuel processing facilities being built in Olkiluoto, Finland, and a final repository also in the early planning stages in Sweden. For Fortum, the main source of ESG risk comes from the CO2 emissions associated with the acquisition of Uniper, which has a heavy coal and flexible gas-fuelled footprint in Europe and Russia. For Vattenfall the main nuclear risk is relatively old age of its nuclear stations, although it has invested in modern safety systems, such as the new cooling system for the Forsmark reactors in 2016 and for Ringhals 3&4 in 2017. TVO’s main ESG risk is its sole reliance on nuclear power generation and how exposed it is to a turn in public opinion following a nuclear event elsewhere, such as was the case following the accident at the Fukushima power plant. However, the report concludes that TVO is “top of the class” so that there is very limited scope for improvement.
The safety record of the Nordic regions nuclear power plants is also very strong, with no nuclear events scoring above 3 on the International Atomic Energy Association’s (IAEA) International Nuclear and Radiological Event Scale (INES). This means that there have been “incidents”, but no “accidents”. Accidents appear to be unlikely given the region’s top tier safety standards and systems.
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