Insight

The current state of the climate: what the IPCC report means for investors

10.08.21

As the first part of IPCC’s Sixth Assessment Report on Climate Change has highlighted, there is no doubt that human influence has warmed the atmosphere, ocean and land, causing widespread and rapid changes to the climate. The summary of the report for policymakers, approved by delegates from 195 countries, establishes a global consensus on the ‘unequivocal’ role of humans in global warming and the rapid transformational changes needed by policymakers less than three months before the UN’s COP26.

It is anticipated that temperatures will continue to rise based on current emissions scenarios, with global warming exceeding 1.5°C above pre-industrial levels by as early as 2040 unless significant reductions in emissions occur in the coming decades. Continued global warming is expected to result in more frequent extreme events, including heavy rain, heatwaves in cities, droughts and reductions in Arctic sea ice. As emissions increase, carbon sinks like forests and oceans are expected to become less effective in capturing and storing carbon. Many of these changes will be irreversible for centuries or longer, particularly those which impact the ocean, ice sheets and global sea level. However, if rapid and ambitious action is taken globally, it is still possible to limit global temperature increases to 1.5°C.

In order to have a 50% or higher chance of limiting temperature rises to 1.5°C, the estimated remaining carbon budget is only 300-500 GtCO2 since 2000 – it is currently being depleted by 42 ± 3 GtCO2 per year.  As outlined in the report, an increase of even 0.5° would worsen extreme events with very tangible increases in the intensity and frequency of heatwaves, precipitation, and agricultural and ecological droughts. To avoid this, we must focus on aligning with the ‘very low’ emissions scenarios, particularly specified in the report as illustrative scenario SSP1-1.9.

It is clear that with further global warming, every region will experience increasing physical climate impacts. At 1.5°C of warming heavy rainfall and flooding will intensify and be more frequent in many regions, including Europe and North America. All regions will experience increases in extreme heat, with heatwaves becoming more severe and flooding more likely, due to urbanisation, extreme rainfall, and sea level rise. The IPCC has signalled the need for greater investment in adaptation solutions to increase resilience to these impacts, such as in early warning systems and water services.

What this means for investors and their engagements with companies

Companies need credible corporate transition plans for this decade: It is clear from the report that it is now more important than ever to prioritise achieving a net zero emissions economy by 2050 at the very latest, and that in order to do so, strong and immediate action is required. As the need to accelerate the transition to a net zero emissions economy becomes more and more pressing, it is important that companies start to move from the what (targets) to the how (action).

The role of investors in driving towards a net zero economy: Investors have an important part to play in actively encouraging companies and policymakers to commit to implementing credible transition plans that will support this achievement. This is why we have focused more recently on encouraging companies to disclose their net zero transition plans and provide a means for investors to vote on progress against that plan and, via the Climate Action 100+ corporate engagement initiative, begun to publish a series of global sector strategies, which map the transition for a number of key sectors, identify priority actions for stakeholders and track company implementation through engagement.

Investors’ commitments to net zero portfolio emissions needs to continue: We are encouraged by the number of net zero commitments made by asset owners and asset managers via the Paris Aligned Investment Initiative and Net Zero Asset Managers initiative, as well as those made by many of the most significant corporate emitters of greenhouse gas emissions, as outlined in the Climate Action 100+ Net-Zero Benchmark.

Companies need to take action to adapt to physical climate impacts: The ability of investors to identify and manage climate-related physical risk in their portfolios is an increasingly important topic for members. Last year, IIGCC produced guidance to support investors to understand, assess, manage, and monitor both risks and opportunities arising from a changing and more variable climate. For more information, access the detailed report, the shorter step-by-step guide or the webinar recording of the launch.

The likely impact on future policy decisions

Without further action, the report explains that global warming of 1.5°C and 2°C will be exceeded during the 21st century. Policymakers will need to implement policies that deliver deep reductions in emissions in the coming decades to ensure at least net zero emissions. The rapid implementation of more ambitious Nationally Determined Contributions (NDCs) will be critical to achieving this, as current NDCs would lead to a temperature increase of at least 3°C by the end of the century, according to UNEP’s Emissions Gap Report 2020.

We are working with other investor networks, via The Investor Agenda, to ensure that it is clear to policymakers globally that investors support ambitious policies for delivering 1.5°C. In June 2021 ahead of the G7 Summit, over 450 investors managing USD $41 trillion in assets signed the 2021 Global Investor Statement to Governments on Climate Change, calling on all governments to undertake five priority actions before COP26 in November:

  • Strengthen their NDCs for 2030 in line with limiting warming to 1.5°C;
  • Commit to a domestic mid-century, net-zero emissions target and outline a pathway with ambitious interim targets including clear decarbonisation roadmaps for each carbon-intensive sector;
  • Implement domestic policies to deliver these targets, incentivise private investments in zero-emissions solutions and ensure ambitious pre-2030 action
  • Ensure COVID-19 economic recovery plans support the transition to net-zero emissions and enhance resilience; and
  • Commit to implementing mandatory climate risk disclosure requirements aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

The strength of investor support backing the statement sends a strong signal to all governments to take urgent action on climate change and will continue to be a core investor advocacy tool throughout the year in the lead up to COP26. By publishing it ahead of COP, the statement has more scope to influence policymakers and governments globally. Institutional investors can support increased government ambition on the climate crisis by signing the statement before 20 October 2021.