The United Nations’ Intergovernmental Panel on Climate Change (IPCC) recently published a new report on the physical science of climate change that made for sobering reading:
- The impact of human activity on climate change is undeniable. CO₂ levels have increased further since the Fifth Assessment Report in 2013, and are the highest in two million years.
- Restricting global temperature rises to 1.5°C, or even 2°C, is slipping beyond our reach; it’s now anticipated that 1.5°C warming will occur by 2040, rather than 2050, even under the most aggressive emissions-reduction scenario.
- Every region of the world will be affected, with extreme events such as flooding, heatwaves, fires and droughts all likely to become more severe and frequent.
- Climate tipping points are probable and changes to ice, oceans and sea levels won’t be reversible for centuries.
- Governments and businesses need to take urgent action both to mitigate these risks (reduce emissions and thus the harmful effects of human activity) and adapt to them (to cope with the inevitable physical damage caused by climate change).
Why the IPCC matters
Since 1988, the IPCC has provided policymakers with regular scientific assessments on climate change, its implications, potential future risks, as well as mitigation and adaptation policy options.
The IPCC does not undertake its own research. But it identifies where there is agreement amongst scientists and where more research is needed.
While its reports are policy relevant, they are not prescriptive. This scientific neutrality ensures objectivity and transparency, while increasing its influence over international negotiations to tackle climate change.
More urgent backdrop to COP26
The latest report will form the scientific basis of international negotiations at the 26th UN Climate Change Conference of the Parties (COP26) due to be held in Glasgow, Scotland later this year.
Governments were already acutely aware of the risks posed by climate change. But this new report shows us that there is even less time for action than when the Paris negotiations took place in 2015.
The Paris deal sought to limit warming ideally to 1.5°C above pre-industrial levels (by targeting net-zero global emissions by 2050), and at the very least ‘well below’ 2°C. Net zero refers to a state in which the greenhouse gases emitted into the atmosphere are balanced by their removal.
Unfortunately, since those objectives were agreed, the world has failed to make the necessary changes.
To achieve net zero by 2050, global emissions need to fall by some 7% each year. The world failed to achieve this last year – emissions fell around 6% -- even after large parts of the global economy were shut down to combat the Covid pandemic. With the global economy now recovering rapidly, it seems likely that emissions will hit new highs in 2022.
We’re not surprised by the urgency of the message that’s conveyed in the new IPCC report. Instead we’re frustrated by the slow pace of action.
We’re not surprised by the urgency of the message that’s conveyed in the new IPCC report. Instead we’re frustrated by the slow pace of action. The severity of the effects of climate change have been clear for some time. In fact, they should not come as a surprise to anyone.
This report puts greater pressure on policymakers to make larger, more tangible and credible commitments at Glasgow. What’s more, the findings will provide ammunition for those seeking change through the courts.
What do the findings mean for investors?
There are three main takeaways for investors:
- Net zero 2050 alignment is not enough. Many investors have adopted net zero 2050 targets to support the global goal of limiting warming to 1.5°C, on the basis that governments would align their own polices with this objective. But existing policy commitments fall far short of what's required, and the IPCC report implies that net zero 2050 is no longer enough to limit warming to 1.5°C. We therefore need to be more honest and transparent about what is achievable.
- A stronger case for active engagement. These findings strengthen the case for active engagement with policymakers, with regards to urgent emission cuts and to provide the policy certainty that will incentivise rapid investor action. It's critical to push for this before, during and after COP26. The same is true for corporate engagement. But in certain sectors, companies can only go so far without the appropriate policy support.
- Focus more on physical risks & adaptation. Even if warming was limited to 1.5°C, extreme weather events caused by climate change will intensify. Physical, economic, health and social damage linked to climate change are unavoidable. This will require significant additional investment in adaptation measures. The investment community needs to deepen its understanding of how these effects will change business operations and supply chains. This includes accounting for the severity of the irreversible, regionally-concentrated and non-linear effects that aren’t adequately captured in discounted cash flow approaches to valuing assets.
Ultimately, the IPCC report warns us that physical damage will be more frequent and severe, even in a world that’s 1.5°C warmer.
Sadly, given the poor track record of climate policy responding urgently to scientific warnings, we need to be prepared for global action falling short of what’s necessary to meet the Paris objectives.