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October 29, 2015

The Royal Fact Check

On Tuesday (27 Oct), the Prince of Wales addressed a gathering of finance executives in the City of London on the potential financial risks of climate change and echoed the sentiment of Bank of England governor Mark Carney over the future role of fossil fuels in the global economy. Prince Charles is no stranger to delivering speeches on climate activism, stating just last month that climate change is a battle “we simply have to win.” How will we win it? Having decided to divest his own portfolio of fossil fuels in April, the prince more explicitly called for charitable organisations in particular to consider divesting.

During his short video address, Prince Charles made a few declarations that, as many commentators said about Carney’s statements a few weeks prior, were big on ideals, but light in factual backing. We take a closer look at the royal’s comments here:

“[The finance community should consider] whether to divest from sectors especially those directly involved in fossil fuels, which will be severely impacted by any agreement to limit global temperatures to a 2 degree rise.”

This statement goes past the ‘debate’ portion of COP21 and straight to the Prince Charles’ preferred conclusion: that nations will decide to snub all fossil fuels. What he fails to acknowledge is that fossil fuel companies, and for our purposes, oil and gas companies, will play an influential role in aiding the transition to a lower carbon economy. In the near term, energy companies will be responsible for bringing online the ultimate transition fuel: natural gas. The Intergovernmental Panel on Climate Change (IPCC) agrees, stating in its 2014 report that:

“GHG emissions from energy supply can be reduced significantly by replacing current world average coal-fired power plants with modern, highly efficient natural gas combined-cycle power plants or combined heat and power plants.”

This same transition is largely to thank for the US achieving record low levels of greenhouse gas emissions, and will be a key facet of the energy portfolio plan China, the world’s largest emitter of CO2, will bring to the table in Paris.

“Secondly, [consider] whether to invest in sectors which support the low carbon economy and are therefore better positioned in terms of risk and opportunities.”

Are all fossil fuel companies in a poor risk/opportunity position? From an investment perspective, the oil and gas sector in particular is a key player in achieving a fully diversified portfolio. According to research house Europe Economics, investors who follow a fossil fuel divestment strategy would have to sacrifice an annual return of 0.68 percentage points (or 68 basis points) or, if they did not want to accept lower returns, would have had to take more than 20 per cent extra risk on their investments in attempts to simulate the risk profile of the oil and gas sector. In speaking to a room of investment executives, shouldn’t the risk profile be taken into consideration?

“Some investors, such as philanthropic trusts and foundations, will also have to consider whether continuing to invest in high carbon assets represents a significant conflict to their overall mission and objectives.”

To each his own, but several foundations have made the clear decision not to divest of fossil fuels, and for good reason. Take the £18 billion Wellcome Trust, for example, which found that it is “more constructive to actively engage with the companies” in which they invest. Or Bill Gates who, in his role as co-chair to the Bill & Melinda Gates Foundation (the largest private foundation in the world), said he doesn’t “see a direct path between divesting and solving climate change.” He took those statements even further in a recent interview with US magazine The Atlantic:

“If you think divestment alone is a solution, I worry you’re taking whatever desire people have to solve this problem and kind of using up their idealism and energy on something that won’t emit less carbon.

While the Royal Family certainly has public sway, to argue that fossil fuels have no future in the global energy mix may be the very idealism Gates and others warn against.