Change with climate change

Celine Legaspi

Vice President, Manager Research
(Monday, Apr, 11, 2022)
|    mins

TL;DR – the IPCC’s new report reminds us that the window to reach 1.5C is closing. Whilst it is still possible to mitigate the worst effects of climate change, thoughtful change and active collaboration and inclusion across government, industry, and financial markets are crucial in achieving a just transition.

It’s no secret that the ESG and climate space is fast-evolving. In the past month alone, we’ve seen major sustainability developments across regulation, industry, and research. From the TNFD draft framework to the landmark SEC climate disclosure proposal, momentum is continuing to build around advancing our understanding of the interactions between people, planet and the economy.

Just last week, the IPCC Working Group III released a report on the mitigation of climate change as part of their contribution to the broader IPCC Sixth Assessment Report. This newly published 3675-page report (!) covers an assessment of the sources of global emissions, progress on climate change mitigation to date and potential impacts of various sectors on climate change.

After rifling through the technical summary and selecting chapters in the main report, I’ve rounded up a few key takeaways – particularly those relevant for our industry moving forward.

Some highlights, lowlights and everything in-between:

  • Wake-up call: Without urgent and meaningful intervention, greenhouse gas emissions are projected to rise beyond 2025 and result in a median temperature increase of 3.2oC by 2100. Although we have seen improvements in energy and carbon intensity since 2010, there remains a positive trend due to increased emissions from rising global activity.
  • 18 countries lead the way: Since the Kyoto Protocol, at least 18 countries have sustained production-based and consumption-based emissions reductions for longer than ten years – demonstrating that effective climate action is within reach across varied development contexts. These reductions may be attributed to energy supply decarbonisation, energy efficiency gains and energy demand reduction from changes in policy and/or economic structure, which support the low-carbon transition.
  • Costs falling, adoption rising: Globally, the unit costs of low-emission technologies and renewable energy have fallen, whilst adoption has grown significantly. For example, since 2010, the cost of solar energy has decreased by 85% whilst deployment has increased by at least a factor of ten. Similarly, the costs of lithium-ion batteries have decreased by 85% and adoption has grown more than 100-fold. This has been aided by policy changes addressing innovation, such as public research and development, funding for demonstration or pilot projects, and subsidies to help bring low-emission technology to scale and compete with traditional fossil fuels.

However, it is evident that developing countries are lagging behind in innovation and adoption due to weaker enabling conditions (e.g. limited capacity and constrained capital), despite potentially being most at risk to the worst effects of climate change. This reality highlights the distributional inequity that exists regarding anthropogenic emissions, and further showcases the need for collaboration and support across jurisdictions.

  • Deep-dive into behaviour: This report is the first IPCC publication to introduce a social science perspective and examine the impacts of behaviour on climate change, affirming the fact that everyone has a role to play in this transition. Approximately, 60 socio-cultural and lifestyle changes that could accelerate climate change mitigation were identified, including sustainable diet changes, reduction of waste, shift in individual mobility choices and even cooling setpoint adjustments. It is estimated that prioritising car-free mobility (walking, cycling, EV) could have the largest potential to reduce carbon footprints.

Individuals with higher socio-economic status contribute disproportionately to emissions and have the highest potential for emissions reductions as citizens, investors, consumers and professionals.

  • Finance as a crutch or lever: The ability for private capital to either help or hinder progress is not concessionary. There remains a misalignment of global capital as finance flows to fossil fuels still outweigh flows to low-emissions solutions. Despite promising and rising climate commitments, this dynamic is not helped by conflicting policy instruments such as fossil fuel subsidies which are still in place today.

To meet our climate ambitions, global mitigation finance needs to rise by three to sixfold. This is more urgent in less developed countries, where investment in some sectors require increased climate finance flows by four to eightfold. From the retrofitting of buildings, to the electrification of transport vehicles and implementation of AFOLU (Agriculture, Forestry and Other Land Use) mitigation options, the report outlines a clear opportunity set in financing the transition across sectors.

  • The nexus of climate and society: The final chapter of the report examines the link between sustainable development, vulnerability and climate risks. Whilst it is entirely possible to achieve the SDGs globally without significant global emissions growth, it is evident that coordinated cross-sectoral planning and action is required to maximise synergies and minimise risks/trade-offs between mitigation and adaptation.

In particular, greater focus on climate justice means emphasising the protection of vulnerable groups from impacts of climate change, mitigating the effects of a low-carbon transition and ensuring equity in a decarbonised world. Complementary policies and investments which integrate the SDGs may be utilised to support efforts and/or alleviate trade-offs related to climate mitigation.

What does this mean for the investment community?

  • Climate change and the factors associated with a ‘disorderly transition’ may have significant negative consequences on people, planet and profit. However, current economic models do not price in these risks – reducing incentives for investment action and historically resulting in limited impact despite relevance, especially for longer term investments.
  • Although the magnitude of costs/benefits from climate action may vary depending on the model applied and stringency of mitigation, the report finds that the global economic benefit of limiting warming to 2oC exceeds the cost of mitigation. If we seek to minimise (and even reverse) anthropogenic greenhouse gas emissions, then the time to act is now and finance has an ever-important role to play.
  • Investment is needed across sectors and regions, especially in AFOLU and emerging markets where there remain significant financing gaps. Further investment research and education on such opportunities may be required in order to ease any concerns investors may have and thus improve access to financial capital for climate solutions.
  • In well-orchestrated timing, the IIGCC released a report last week on the financing of low carbon solutions. This publication provides a framework for identifying priority climate investments, supporting the IPCC’s call for action and real-world change via finance flows.

Ultimately, the IPCC report illustrates the urgency of the climate crisis alongside promising climate mitigation and adaptation options available for implementation – prompting us to consider our role in a low-carbon future as both individuals (via behaviour/lifestyle changes) and investors (via thoughtful allocation of climate finance).


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