Germany’s nuclear legacy: how KENFO invests €24bn for waste disposal

KENFO is a relative newcomer to Germany’s institutional landscape, but one with a unique mandate. Established by the German government in 2017, it manages €24bn set aside to fund the disposal of the country’s nuclear waste – a task expected to cost as much as €130bn by the end of the century.

The government had also earmarked KENFO to manage a proposed €200bn sovereign wealth fund known as Generationenkapital. But those plans were shelved last year after the federal election, when the ruling Christian Democrats expressed scepticism. For now, the endowment’s sole task remains nuclear clean-up.

Germany’s nuclear legacy has long been fraught. The country once sourced more than a quarter of its electricity from nuclear plants, yet disputes over hazardous waste disposal have dragged on for decades. Interim storage sites have been plagued by safety concerns, environmental protests and the risk of contamination. Following the Fukushima disaster in 2011, Germany committed to phasing out nuclear power altogether – but the waste remains, with no final repository yet agreed.

To help address the problem, nuclear operators made a one-off payment to KENFO, effectively transferring responsibility to the state-backed fund.

Risk, returns and liquidity: making the maths work

That €24bn contribution will have to be worked hard to make the maths work. KENFO’s target is an average 3.7% net of inflation – a demanding goal given inflationary pressures and regular payouts. By law, the fund covers disposal costs on an annual basis, spending €805m in 2024 alone.

This liquidity requirement forces KENFO to keep at least 20% of assets in liquid instruments such as cash and money market funds. With German CPI inflation above 2%, relying on Bunds alone would leave the fund far short of its ambitions.

Instead, the strategic asset allocation permits up to one-third of assets in alternatives, between 10% and 50% in equities, and a minimum 20% in liquidity. Compared to other German institutional peers, this represents a bold tilt towards private markets – one reason Kempe was recruited after nearly eight years at Bad-Homburg-based alternatives manager FERI.

Hedging inflation with real assets

The uncertainty around final disposal costs makes inflation protection critical. KENFO has therefore leaned heavily into infrastructure.

“It has become a cliché to call infrastructure an inflation hedge,” Kempe admits. “But the reality is that most real assets have inflation-hedging features embedded. That’s why so much of our portfolio is invested there.”

By contrast, real estate remains a small allocation. “It wasn’t opportune at the time we first deployed assets, given negative interest rates,” Kempe says. This leaves KENFO’s private market profile looking very different from that of a typical German institution.

The bond portfolio is also unconventional: only 10% is in government debt, with the rest in corporate bonds, high yield and emerging markets.

KENFO currently works with 18 managers including Axa, Aberdeen, BlackRock and Ninety One, but does not disclose details on individual funds. While listed assets are managed via segregated mandates, illiquids are invested externally. To reduce costs, the fund is increasingly exploring co-investments, particularly in infrastructure and real estate.

“We began investing in infrastructure during the Covid era, when transport was highly unpopular,” Kempe notes. “That has gradually changed, and we’ve since invested in transport through co-investments.”

Fossil fuels in the spotlight 

Given its mission, sustainability is a central pillar of KENFO’s approach. The endowment has pledged net zero by 2050 and is a member of the Net Zero Asset Owner Alliance. It is also prohibited from investing in nuclear power, in line with the German government's commitment to phasing out nuclear energy.

But it has faced criticism from campaign group Urgewald, which accuses it of holding fossil fuel producers despite its climate commitments. Campaigners are urging full divestment.

Kempe insists the fund has not increased fossil fuel exposure and argues that transition investment is more effective than exclusions. “Exclusions should be the last instrument,” she says. “Our task is to deliver stable returns to fund waste disposal. That requires a broadly diversified portfolio, which means we cannot exclude the energy sector altogether.”

Still, she highlights that KENFO has pledged not to finance new oil and gas production across its infrastructure portfolios, and instead applies a best-in-class approach within sectors, with the aim of phasing fossil fuels out gradually.

Why not divest immediately? Kempe points to both mission and mandate. “First, it’s better to invest in the transition and support the phase out. Second, our job is to generate stable returns to finance nuclear disposal. That requires diversification and all possible stabilising factors.”

Some critics warn that fossil fuel holdings may themselves create instability as oil and LNG prices fall. Kempe is confident these firms will fade in relevance.

“If you look at the companies that dominated stock indices 100 years ago, many no longer exist. The same will happen with fossil fuel firms – they won’t have the importance they do today.”

For her, technological progress will be decisive in order to reach net zero: “It will be the key to a positive tipping point in tackling the climate crisis.”