What the IPCC report says
On 9 August 2021, the Intergovernmental Panel on Climate Change (IPCC), comprised of the world’s leading climate experts, published the first part of its sixth global climate assessment. The IPCC was set up by the UN and World Meteorological Organization in 1988 to provide policymakers with regular scientific assessments on the current state of knowledge about climate change.
The first report focuses on the physical science. The second report (expected in February 2022) will focus on climate impacts and adaptation and the third report (expected in March 2022) will focus on climate mitigation, with the final synthesis report pulling everything together in September/October 2022.
The title of the IPCC’s press release pretty much says it all: climate change is widespread, rapid and intensifying. The UN Secretary-General, Antonio Guterres, described it as “code red” for humanity and that it “must sound a death knoll for fossil fuels”.
The IPCC’s latest findings says it is “unequivocal” that human activity is responsible for the current climate crisis and that the goals of the Paris Agreement will be missed without deep and rapid cuts to greenhouse gas emissions (in particular carbon emissions but also other potent GHGs like methane).
An increase of 1.5 degrees Celsius (above pre-industrial levels) in global temperature is thought to be the level beyond which the impact of climate change (which we are already seeing now) will get much worse - with higher frequency and severity of floods, heatwaves, wildfires and droughts. According to the IPCC’s best case scenario (i.e. even with deep reductions in GHG emissions), we’re expected to reach the 1.5C increase by 2040. According to one of the report’s lead authors, Piers Forster: “If the world can substantially reduce emissions in the 2020s and get to net zero carbon emissions by 2050, temperature rise can still be limited to 1.5C”. Which is why this decade is being heralded as the “make-or-break decade” for climate action.
For those who have been following the climate debate closely, these findings won’t come as a big surprise. We just have to look at news footage over the last couple of months to see this in real time: devastating flooding, heatwaves and wildfires raging across the globe. But for those who are still at an earlier stage of their climate journey, the IPCC’s latest findings will make it harder to justify either not taking any action or just doing the bare minimum.
So what does the IPCC report really mean in practice?
1 Prepare for more climate regulatory action
It’s likely that the IPCC’s report(s) will put pressure on governments across the globe to consider introducing new or more stringent climate regulation and policies. These might include rules on the phase out of coal power plants and internal combustion engines, climate reporting for corporates and the financial sector, climate stress testing for banks and insurers combined with “supervisory expectations” of how financial regulators expect banks and insurers to deal with climate risks, anti-greenwash rules for investment products, and possibly carbon taxes and emissions trading schemes.
The EU and UK are already quite advanced on this front (see here). And no sooner has the European Commission published its mammoth “Fit for 55” package of proposed changes to EU legislation and policy than questions are already being asked as to whether in light of the IPCC’s latest report that will be enough to avert climate disaster.
The US is still at a relatively early stage on its path to climate regulation (see here), although we are expecting some potentially big announcements on climate disclosure from the SEC before the end of the year (see here). Asia, on the other hand, is further ahead (see here and here).
All eyes are now on COP26 where global leaders will meet in November in Glasgow to hammer out the next global climate agreement – with some of the key questions being:
- Will governments commit to more ambitious climate targets and action?
- Will developed nations agree a finance package that enables developing countries to sign up to steeper reductions in their GHG emissions?
- Will a global agreement be reached on the phasing out of coal and other fossil fuels by a certain date?
- Will mandatory climate reporting become the global norm?
- Will global leaders reach a consensus on the need to put a price on the cost of carbon? Be it through cap & trade emissions trading schemes (like the EU ETS and UK ETS), a carbon tax or more complex hybrids such as the EU’s proposed Carbon Border Adjustment Mechanism.
2 Climate change will impact all asset classes in pretty much all regions
The IPCC report makes it crystal clear that it’s warming almost everywhere and it’s warming rapidly. However, there will be some variations depending on your geographic location. This is where the Regional Fact Sheets that were published alongside the IPCC report come in handy.
In any event, for asset managers and owners as well as lenders and insurers worldwide, the clear message is that climate change can impact all asset classes regardless of where they are located. So climate change is clearly financially relevant to investment portfolios, putting a greater emphasis on the need for climate risk assessments and risk management programmes. And asset owners should also be asking their asset managers if their business models are fit for purpose and whether they align with asset owners’ own climate objectives and commitments.
And for investee companies, now is also the time to rethink business models and strategies if you haven’t already started. Greater investor scrutiny and engagement will likely speed up the trend we are already seeing in terms of the reallocation of capital to more sustainable investments and market repricing to reflect the risk of potential stranded assets. According to the executive chair of the Carbon Tracker Initiative: “any company whose core business exposure is to a high carbon economy faces significant reweighting by markets in the next decade”.
But you don’t have do this alone or start from scratch – there are a number of industry initiatives that have sprouted over the last 12-18 months to help the financial sector and corporates roll out credible climate strategies, such as the Net Zero Asset Owners Alliance, the Net Zero Asset Managers Initiative, the Partnership for Carbon Accounting Financials, and the Race to Net Zero alliance.
3 Prepare for disruptions to supply chains
It stands to reason that if climate change can impact all asset classes in all regions of the world, then this will also impact global supply chains. Although the agri-food sector is likely to be particularly affected, this is not the only sector at risk.
And it’s not just about reducing the risks of climate change (be they physical or transition risks), it’s also about adapting and building resilience to the climate impacts that are already happening.
For practical tips on supply chain resilience, see our publication Supply Chain Resilience Programmes.
4 Investor engagement on climate issues will likely ratchet up
Earlier this month, a group of 53 global investors with US$14 trillion in asset under management called on companies to disclose a net zero transition plan, identify the director responsible for the plan, and provide a means for investors to vote annually on progress against the plan (see here). The group of investors has warned corporates in carbon-intensive sectors to prepare for climate change to remain firmly on the agenda for the 2022 AGM season.
The IPCC’s latest findings provide investors with an even stronger case to demand more action from businesses (e.g. earlier targets, clearer intermediate targets by 2030, more stringent criteria for use of carbon offsets, etc).
For practical tips on formulating robust and credible climate plans, see our publication Climate Change Plans and Targets.
5 More ammunition for climate litigators
According to the Grantham Institute’s latest report on global trends in climate change litigation published in July 2021, there has been an exponential increase in climate change litigation across the globe, with cases targeting not just government inaction but also companies and the financial sector. The recent decision in the Shell climate case in particular has led to much speculation as to whether this is likely to result in copy-cat litigation against other companies (not just oil & gas companies) both in the Netherlands and other countries (see here).
The latest IPCC report has given climate litigators even more ammunition, with ClientEarth’s director of climate and energy, Maria-Krystyna Duval, warning that: “The boards of individual fossil fuel companies should be preparing for their day in court”. And Greenpeace saying: “We’ll be taking this report with us to the courts”.