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A speech by HRH The Prince of Wales at the Accounting for Sustainability (A4S) Debt Finance: Capital Markets Resilience, Risk & Opportunity Event

Published on 7th June 2017

Ladies and Gentlemen, I am delighted to welcome you all to St. James’s Palace today and I can't thank you enough for your contribution to the research on debt finance being conducted by my Accounting for Sustainability Project.  I gather that you have already been made to work rather hard in the run up to this event, but I hate to say that after today the real effort needs to begin. And by the way, just to reassure you, I am not doing all this as part of some obsessive pet project, nor am I doing it for my health, but rather for the health of this poor old over exploited planet of ours, after all the only one we have; and to ensure that we understand how vital it is for the future that we re-align our own economy with nature's economy, to be on the safe side.

Now, before I go any further, I just want to stress – if it isn't already entirely obvious! – that I am not a financial expert, particularly on debt finance issues, but I am reliably informed that in the room today we have an important group of leading experts, covering all aspects of the debt and lending markets.  I am therefore convinced that your skills and experience will be utterly invaluable in forging a way forward.

At the U.N. Paris Climate Conference in December in 2015, global leaders – or at least quite a large proportion of them – at last reached an agreement setting out the first steps towards a climate deal that could put the world on a pathway towards limiting the rise in average global temperatures to below two degrees above pre-industrial levels – and, for the first time, recognizing the urgent need to aim higher and to limit the increase to below 1.5 degrees centigrade in order to have any chance of a durable future.  If we are to have any hope of achieving this target, vast amounts of capital, as I'm sure you realise, will have to be moved away from high carbon assets and diverted into the low carbon transition.  It is worth noting how fast this transition is starting to happen.  Last April, for instance, National Grid reported that the U.K. ran for a full 24 hours without coal for the first time since the Industrial Revolution.  They expect this trend only to continue with the growth of de-centralized, local and renewable power generation.  After all, analysis from Carbon Brief showed that the U.K. generated more electricity from wind than from coal in 2016.  Most people don't realise this, but it's quite encouraging in some ways. So the future is here today, and change is happening at a rate which may take some by surprise.

In addition, while the U.N. Sustainable Development Goals provide a potential pathway towards a more manageable future, finding a way to finance them will be a huge challenge.  As the World Investment Report has estimated, global investment of between five and seven trillion U.S. dollars per annum will be needed, the majority of it in developing countries, and much of it in low carbon infrastructure.  The public sector, on its own, cannot possibly meet that demand.  The activities of the investment and business communities in the next few years are therefore going to be crucial. 

And so, Ladies and Gentlemen, this, I'm afraid, is where you come in. As you know far better than me, financial institutions play a pivotal role in the movement of funds across the global economy, and all investments are statements about the future, where money moved today defines the world of tomorrow. This means that – in terms of tackling climate change before we reach the tipping point, beyond which it will be next to impossible to rescue the situation (and that is very close at hand, according to the climate scientists) – banks, pension funds and asset managers hold many of the keys to success, as well as to potential failure.  And yet many financial institutions continue to direct funds towards high carbon energy projects and towards companies which, if they continue with their current business models, are frankly unsustainable. 

The case for action is not just to have some hope of retaining a habitable planet for us all – although that does seem to me to be a rather powerful incentive – it is also to ensure a genuinely sustainable financial future for companies and governments alike.  Investments made without consideration of broader environmental and social factors may well lose a great deal of their value and become "stranded", both through the physical impacts of climate change, as well as through regulation put in place to address it.  New, disruptive technologies such as battery storage are likely to have fundamental implications for the utilities sector, with the potential for greater numbers to move "off-grid". By "tilting" investments away from high-risk areas and financing low carbon solutions, lenders can reduce the level of risk across their portfolios.  And, of course, it is not just carbon which we must address.  There are significant risks to cash flows from broader E.S.G. concerns, such as water scarcity, ecological degradation, a widening gap between rich and poor, and a global population that in large areas of the world is rising exponentially and unsustainably and is expected to reach over nine billion people by 2050.  And already, key experts have warned that we are breaching planetary boundaries in all directions, to the extent that we require not one, but four planets to fulfil our burgeoning needs.

Now whilst I am pleased to hear that many amongst you today are starting to consider these issues, unbelievably there are still those in the investment world who, in spite of these warnings, struggle to see the relevance of these macro risks and opportunities to their day-to-day decision making.

There is, however, some cause for hope.  I understand a great challenge for investors, banks and companies is a lack of transparency, which is why I am delighted to hear that the F.S.B. Task Force on Climate-related Financial Disclosures has recently released a set of recommendations for voluntary, decision-useful, climate-related disclosures to be made as part of mainstream financial filings.  For banks, for instance, it is recommended that they describe significant concentrations of credit exposure to carbon-related assets, as well as consider disclosing climate-related risks in lending.  And there are equivalent recommendations for asset managers and asset owners.

In addition, asset managers are starting to offer a greater range of low carbon products as part of their "mainstream" offering.  For example, I was much encouraged to learn the other day that H.S.B.C. has been leading the way by working with Legal and General Investment Management to launch a "Future World Fund" as the default fund for their defined contribution scheme.  And this seeks to have the advantages of a low-cost tracker fund while also "tilting" investments to recognize the very real risks and opportunities presented by climate change and other E.S.G. factors.  This is, of course, as you know better than I, an equity market product.  However, equally heartening is the fact that I understand some of you at least are considering how you might provide low carbon fixed income funds.  And I am told that evidence is starting to emerge which shows that fixed income funds which integrate E.S.G. risks have lower rates of default and can outperform market benchmarks.

So things are maybe looking up as I am pleased to note from the research conducted by my A4S Project which highlights that some of you in the room are actively deselecting companies and sectors, and moving away, not only from carbon intensive areas, but also from other ethically dubious industries, and all that you are doing this for very sound commercial reasons. 

Further, companies are starting to select banks and advisors based on their sustainability credentials, creating an additional incentive to act.  Pension funds are also taking action, strengthening mandates to incorporate E.S.G. requirements and asking tougher questions of their asset managers.

And Ladies and Gentlemen, whilst this is all very promising, I fear there is much more to do; and what we need to understand is that the all-too-common indifference and disregard for these growing risks is, in itself, a serious threat to our global financial stability, and to a properly functioning economy and capital market.  A lot of work has actually been done in recent years to build resilient capital markets focussed on fundamental analysis and the long term, but of course there is still a long way to go.  The barriers to this far-sighted approach are not easy to overcome, but as some of you have already demonstrated, they are not insurmountable.  I need hardly say, Ladies and Gentlemen, that I am full of admiration for those amongst you who have the courage and far-sightedness to step outside the conventional comfort zone.  You are the ones whom history will ultimately remember…

So, there is just time for me to thank P.W.C. for supporting this project and to express a hope that, in a room brimming with such talent, we can look forward now to hearing some practical and provocative suggestions as to how we might make real progress at the end of the day – before the dreaded sands of time run out, and they are running out rather fast out of the glass I can assure you.

Thank you Ladies and Gentlemen.