The Intergovernmental Panel on Climate Change (IPCC) has published its sixth assessment report (AR6) this week. It has captured headlines around the world, and sets a sobering backdrop in the run-up to COP26, which will bring global leaders together to agree the next leg of global action to tackle the defining challenge of our era.
As global investors, the path ahead is clear. The latest IPCC report underlines the scale of the challenge ahead and adds impetus to political action and social pressure, but doesn’t change the destination toward which we are heading.
What we’ve learned from the report
There is little in the report that is entirely new. The growing body of science on climate change allows its authors to state with more certainty that the climate is changing, that human activity is responsible and that the consequences of those changes will be dramatic. But the balance of public and political opinion had already accepted those points.
More tellingly, buried in scientific authors’ tendencies for dry and precise language, the updated analysis leaves no doubt in the scale of the threat ahead. The IPCC has helpfully underlined the consequences of inaction. More physical damage is unavoidable; in any of the scenarios it paints, temperatures will rise to 1.5C in the 2030s.
If emissions are cut through 2050, temperatures will fall later in the century, but initial increases – the results of lags between emissions and temperature rises – are inevitable. Without action to cut emissions in coming decades, temperatures will rise by up to 4C over that historical baseline before the end of the 20th century.
What this means
While the difference between 1.5C and 4.0C might sound minor, the human consequences are not. A 1.5C temperature rise will lead to 2.4 times more frequent droughts and a 1.5 times increase in extreme precipitation. At 4C, those risks roughly double to 5.1 times and 2.8 times higher frequencies, at which point many parts of the world will become uninhabitable, mass migration becomes unavoidable and the economic impacts will be severe. Those warnings may provide the catalyst governments still need to coordinate ambitious and comprehensive action to reach net zero emissions by the middle of the century.
What needs to be done
Reaching that goal will require halving global emissions over the next decade, or 6-7% annual reductions. Over the past 50 years, carbon emissions have risen by 2% annually on average.
While possible, that scenario is highly optimistic unless significantly more aggressive steps are taken. I might compete in the next Olympics, but it’s not going to happen unless I completely rethink my priorities and training regime.
The Covid crisis may provide the springboard needed. 2020 is the only year global emissions have fallen anywhere close to the pace we will need to sustain, by 6%, although even that decline appears to have been at least partially temporary – with global emissions rising to 2% higher than the year before by December 2020.
That said, political leaders have maintained their focus on the climate threat, tying stimulus plans to climate goals and setting national decarbonisation targets to deliver a net zero world around the middle of the century.
To date, governments representing over 70% of the world’s emissions and economic output have established national net zero targets, and green infrastructure spending commitments may tally to ~$2 trillion over the next decade, with the vast majority of funding expected from private sources.
Despite this ambition, much of the hard work on delivering on these pledges is still to come and will rely heavily on technological advancements for those harder-to-abate sectors: the IEA anticipates that close to half of the CO2 emissions savings beyond 2030 will come from technologies that are still under development.
For more visit Schroders insights or click the links below:
– IPCC report: why the detail matters to energy investors
– Q&A: Why are heat pumps so important for the energy transition?
– Video – The company using agricultural waste to power your car
Companies must do more
Companies have started to follow suit but have further to go. Companies representing around 15% of the value of global equity markets have committed to reducing emissions quickly enough to limit long run temperature rises to 1.5C, based on our analysis of companies setting goals through the Science Based Target initiative.
Investment in clean technologies and new growth products is similarly rising, but too often remains siloed in discrete product categories rather than targeting wholesale redesign of their entire product range.
Given the scale of change required, whether the global economy will deliver a net zero transition in the next three decades is debatable. But the timing is the key question, not the imperative of a transition. Less ambitious goals to limit long run temperature rises to around 2C will stretch the process out by a few decades but don’t alter the need to reach net zero emissions or the imperative for action.
Earlier this year, we committed to setting a Science Based Target and are finalising its details. We have also joined other asset managers to urge political leaders to step up their climate ambitions. More importantly, we are defining the path we will take to get there and ensuring we are as equipped as possible to manage the risks and seize the opportunities facing the investments we manage for our clients.
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