By Rick Lord, Gautam Naik and Esther Whieldon
In a year of devastating droughts, wildfires, storm surges and flash floods, a scientific report from the UN’s Intergovernmental Panel on Climate Change (IPCC) is another wake-up call for investors trying to assess the impact of climate change.
A key message: although the planet has already reached a tipping point in some aspects of a warming climate, urgent and large-scale action can still help mitigate the worst scenarios.
The nearly 4,000-page report, assembled by a team of hundreds of scientists, exhorts corporations and governments to act more urgently to cut emissions and respond to a world of severe weather events and other consequences of rising temperatures.
The IPCC’s findings can help businesses, investors and regulators use data about their specific circumstances to understand how climate change can impact them directly – for example, in the form of physical risks to their office buildings and other physical infrastructure, employee health and broader economic drivers.
Why IPCC analyses get attention These reports pack a punch. For instance, the IPCC’s interim climate assessment in 2018 shaped policy discussions and investor expectations around the world over the past few years. That was the interim report that made mainstream the idea that the world needs to achieve net-zero emissions by 2050 to limit global warming to 1.5°C relative to pre-industrial levels. That prompted many companies to set net-zero targets amid growing investor pressure.
The publication of the latest report came less than 90 days before the November COP26 gathering of parties to the Paris accord in Glasgow, UK, an important event on the global sustainability calendar.
Authors of the report in a press briefing indicate they hope their findings will prompt governments and policymakers to raise their ambition on tackling climate change ahead of COP26. At present, government pledges fall far short of the action necessary to achieve the Paris Agreement goal of limiting global warming to 2°C relative to pre-industrial levels.
Sobering takeaways for investors One of the key findings of the latest IPCC report is that the increase in global average temperatures could hit 1.5°C in the early 2030s under all emissions scenarios. That’s about 10 years sooner than previously projected. This means the impacts of climate change will also worsen at a faster pace.
But even under a net-zero scenario, global warming could reach as high as 1.7°C relative to pre-industrial times by 2040. Although the world might in the interim overshoot the 1.5°C goal even while pursuing net-zero emissions, temperatures could later drop again as global output of emissions starts to decline in pursuit of that target.
By comparison, a worst-case, high-emissions scenario would most likely result in warming of 2.4°C from 2041 through 2060, and global warming would continue to climb to 4.4°C by the end of this century relative to pre-industrial levels. These differences in temperatures make a big difference to how much damage occurs to the planet.
How asset portfolios are exposed S&P Global Trucost has analyzed the physical risks linked to climate change that most of the world’s companies face. The analysis uses market cap-weighted average physical risk scores across seven risk indicators under low, moderate and high-emissions scenarios in 2050, including data from 15,000 public companies, representing about 95 percent of global market capitalization.
The analysis under the high scenario shows that, on average, companies are most exposed to water stress, with a score of 60, followed by heat waves, cold waves and wildfires.
Even small increases in annual global temperatures can make a huge difference in the impact of climate change, the IPCC report notes. ‘With every additional increment of global warming, changes in extremes continue to become larger,’ the IPCC writes in the report’s summary for policymakers. For example, only half a degree of warming causes ‘clearly discernable’ increases in the intensity and frequency of hot extremes such as heat waves, heavy precipitation and agricultural and ecological droughts, the report points out.
The IPCC also finds that compound events – when two or more climate impacts such as heat waves or droughts occur at the same time – are becoming more frequent as global warming rises.
The role of human activity Scientists in this report were also able to better connect human-caused emissions – primarily due to the burning of fossil fuels – to specific climate and weather extremes such as heat waves, heavy precipitation that leads to flooding, droughts and tropical cyclones.
Climate change-exacerbated events can prove costly. For example, the US experienced 22 extreme weather-related disasters that collectively caused at least $95 bn in damages during 2020, according to the National Oceanic and Atmospheric Administration.
Among other things, the IPCC report notes that change in the number of major category 3-5 tropical cyclones is likely linked to climate change. The report also notes that climate change is causing tropical cyclones to produce more rain than in the past, which can lead to catastrophic flooding of the kind seen in Texas in 2017 due to Hurricane Harvey.
Net-zero goals only one part of puzzle While the report continues to frame net-zero as an important target, it also makes clear that action needs to be taken immediately to slow the pace of climate change – and the private sector’s role is key.
For example, pricing transparency in the voluntary carbon market is needed to channel investment into projects that make a difference, such as capturing carbon from the atmosphere. Most recently, S&P Global Platts has been assessing the value of carbon offsets associated with carbon-capture projects at upwards of $100 – with such projects providing a key potential tool for facilitating net-zero or even net-negative efforts.
In previous reports, the IPCC has shied away from saying the world is past the tipping point for stopping certain cascading impacts.
That has changed in the latest report, which suggests the best the world can hope for in some circumstances is to slow the pace of those changes. Impacts that could worsen for decades – even thousands of years – include Arctic ice melt, ocean acidification, warming ocean temperatures, and sea-level rise.
The forecast makes clear the need for urgent action to combat and adapt to climate change.
This should prompt companies and investors to speed up plans to lower emissions and to look for climate assessment tools in order to better understand how changes to the ocean and sea levels might affect their operations, physical assets and investment portfolios.
