Bloomberg data suggests that the private equity industry’s positivity towards nuclear energy has highlighted the alternative power source as a key component in the fight to achieve climate goals. 

The growing demand for AI data centers among leading tech firms like Amazon, Google, and Microsoft, all of which have agreed on deals in the atomic sector, has also contributed to the positive sentiment throughout the industry. 

Some hedge funds like the world’s largest money manager, BlackRock, had previously emphasised a purpose-driven commitment to investing. However, factors like greenwashing and diminishing returns are seeing the same firms perform a U-turn on their commitments. 

With investor interest moving closer to alternative energy stocks and a famously climate-sceptical President set to return to office in 2025, is Wall Street set to go nuclear in the year ahead? 

The Unsustainability of ESG Investing

Although many institutions bought into the promise of ESG investing in the wake of the pandemic, inconsistencies in environments, social, and governance reporting have led to inefficiencies among investment opportunities. 

These inconsistencies can lead to mispriced assets and widespread confusion among investors, putting more investors at a disadvantage if they’re unable to access the relevant resources to conduct due diligence on their investments. 

Another issue with ESG investing stems from greenwashing. In a nutshell, greenwashing refers to companies overstating their ESG credentials and even fabricating environmental commitments in a bid to boost their appeal to investors. 

According to a study by Quilter, 44% of UK investors have become wary of greenwashing within their ESG investments. As a result of greenwashing, ESG-focused portfolios can be confined to limited market opportunities with very little evidence that they’re assisting sustainability efforts. 

The ESG Exodus

Although clean energy initiatives have received plenty of stimulus packages across the US, Europe, and China in recent years, more hedge funds are beginning to adopt short positions against sectors like batteries, solar power, hydrogen, and eclectic vehicles (EVs).

While the sustainable energy landscape has grown to become a $5 trillion industry, hedge funds appear to be sceptical of the long-term profitability of green investments, with many initiatives seeking to transition towards clean energy in the future. 

For hedge funds, a sustained period of underperformance has strengthened the convictions of fund managers that there are precious opportunities for high returns in the industry at present and their attention is better served elsewhere. 

Hazeltree data shows that as much as 77% of green sector stocks were shorted by hedge funds in October, pointing to a significant increase in early 2021 when just 33% of the stocks were the target of short sellers. 

One of the biggest examples of hedge funds moving away from their ESG commitments can be found in BlackRock. When CEO Larry Fink claimed that the world’s largest fund manager would back purpose-driven investing in 2020, it encapsulated the spirit of the time. 

However, by November 2023, BlackRock was putting $550 million into one of the world’s largest carbon capture projects in Texas. Fink responded by emphasizing the size of the investment opportunity while highlighting that the firm would continue to work with major energy companies. 

Aside from the weakening profitability of ESG investing, hedge funds have come under political pressure for their strategies in recent years. 

Rather than greenwashing, a new term, ‘greenhushing’ has been coined to describe the muting of ESG initiatives through fear of a backlash. 

According to Alyssa Stankiewicz, ESG fund researcher at Morningstar, around 40% of US companies have experienced some form of backlash for their environmental, social, and governance commitments, with conservatives associating the term with the peddling of a woke agenda. 

With the recent election victory for Donald Trump, the climate-sceptical President-elect is likely to contribute to the ESG exodus for hedge funds, and it appears that nuclear energy is being highlighted as the alternative energy opportunity that fund managers have long been waiting for. 

The Rise of Nuclear Investing

The emergence of nuclear investing as Wall Street’s freshest market opportunity for hedge funds has been rapid, according to recent analysis from Goldman Sachs spanning 697 funds with over $3 trillion in assets under management. 

During Q3 2024, more fund managers looked to nuclear energy stocks due to the growth potential caused by the AI boom, which could prompt a strategic shift as the sector’s rapid growth intensifies the demand for large-scale energy. 

Already tech firms like Meta Platforms and Google’s parent company Alphabet have suggested that nuclear facilities could be intrinsic in providing consistent, high-capacity power without carbon emissions in meeting expansive AI workloads. 

As a result of the shift in emphasis, nuclear stocks like Vistra Corp (NYSE:VST) and Talen Energy Corp (NASDAQ:TLN) have posted growth of 320% and 229% respectively over the opening 11 months of 2024. 

With nuclear identified among leading AI players as the possible alternative energy source to drive the evolution of the technology, we’re likely to see more institutions use prime services to access global nuclear stocks to maximize their exposure to international carbon-free initiatives.

Nuclear Investing to Gather Momentum

Given the long-term underperformance of ESG stocks after an initially promising post-pandemic boom, as well as the prospect of high-profile political opposition to clean energy initiatives, we’re likely to see nuclear power become increasingly coveted as the alternative energy source to power the ongoing AI revolution. 

Institutions have been quick to identify the market opportunities of nuclear power, but in a landscape that’s becoming increasingly suspicious of ESG credentials, we could see the nuclear sector gather more momentum in the future.