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Responsible investment
12 Oct 2018 | By Freddie Woolfe

Powerful reading

Freddie Woolfe, head of responsible investment and stewardship, weighs the latest UN report on climate change and its potential implications for the planet, policy makers, companies and investors.

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On Monday the Intergovernmental Panel on Climate Change (IPCC), the United Nation’s climate body, released its special report on the impacts of global warming at 1.5 degrees above pre-industrial levels. This is in alignment with the Paris Agreement’s intention to keep an increase in the global temperature to well below two degrees by the end of the century, with an ambition of limiting the rise to just 1.5 degrees. The world is already one degree warmer.

The report makes for powerful reading:

Current commitments are broadly consistent with three degrees warming.
This is well above the higher target of two degrees that was agreed in Paris and could result in major changes to the planet.

Achieving two degrees warming isn’t a panacea.
The significant benefits of limiting global warming to 1.5 degrees over two degrees includes reduced warming at temperature extremes, a 50% reduction in the proportion of the population exposed to water stress as a result of climate change, a ten-fold decrease in the number of Arctic summers with no sea ice and meaningfully lower loss of biodiversity.

The changes required will be unprecedented and success is dependent on a wide range of factors
. These include geophysical, environmental, technological, economic, cultural and institutional considerations.

To achieve the 1.5 degrees target by 2100, global man-made emissions must decline 45% by 2030 from 2010 levels and achieve net zero (i.e. take as much carbon out of the atmosphere as is emitted) by 2050. This is in contrast to a 20% reduction by 2030 and net zero by 2075 for the two degrees scenario. The report highlights four pathways to achieve this rapid drop-off in emissions, identifying in particular the breadth and pace of the transitions required in the energy, land, transport, buildings and industrial sectors.

What, then, does this mean for investors?

The report is likely to galvanise further discussion on whether current policy goals to reduce global warming even in line with the two degrees target are sufficient, both in terms of ambition and the speed of action. If policy making begins to coalesce around 1.5 degrees as the new target, the extent of the risk to companies in high-carbon sectors and the requirement for them to embrace low-carbon transition would further deepen.

Furthermore, faster action to reduce carbon emissions could have a more pronounced influence on current valuations of carbon-intensive businesses and products as the costs from the policies are felt sooner.  On the other hand, adaptation costs for investee companies will likely be lower as the impacts of climate change are reduced.

The next major climate policy meeting is in December at COP 24 in Poland, where operational guidelines to achieve the Paris goals will be developed. This might provide further clarity on the potential impact that this latest report will have on policy, but what is already increasingly clear is that the urgency to act is growing. While the range of actors that will need to be involved in the transformation to a low-carbon economy is widening, which adds significant risks for some companies and sectors, it also offers major opportunities for those that foresee the trends and take action accordingly. The imperative for investors to consider how climate change will impact their portfolios has therefore never been stronger.

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