Climate change is affecting humans and ecosystems across the globe, and we need to step up to better prepare for future impacts. That’s the key message from the UN’s Intergovernmental Panel on Climate Change’s (IPCC) new report on Impacts, Adaptation and Vulnerability. The report comes at a challenging time, when the pandemic and geopolitical events are forcing a realisation that better resilience is required in many areas of life, including energy and food systems.
Why is this report important?
Every eight years, the IPCC collates the work of hundreds of scientists who’ve ploughed through vast amounts of scientific literature on climate change. The reports they produce are ratified by all the countries in the UN System and are considered the definitive last word on climate science. This report from Working Group 2 (WG2) forms part of the IPCC’s Sixth Assessment Report (AR6). Working Group 1 (WG1) drew a line under the physical science of man-made climate change (read our summary here). While WG2’s report looks at the world’s vulnerabilities to climate change, presenting the latest evidence of the impacts and humanity’s ways of adapting to them.
The IPCC’s Working Group 3 (WG3) report on climate mitigation will be released in April. The focus will be on how the global economy could transition to reach net-zero emissions. Three three reports will then be summarised into the AR6 in September. The AR6 report will be the key reference point for international climate policy negotiations and investor engagement in the years to come.
What are the key insights of WG2’s report?
- Observed and projected impacts from climate change are worse than we thought: Climate change is happening now, it’s affecting people’s lives and livelihoods around the world and it’s happening more quickly and extremely than scientists expected. Climate impact in the next 10-15 years will be far greater than what we’re experiencing today. Every region will face more extreme weather events, such as heatwaves and heavy precipitation. These consequences have an impact on both human and natural systems – they affect people, animals and plants.
- Human society is exposed and vulnerable to the risks of climate change: One of the most striking figures from the report is that 3.3-3.6 billion people, that’s roughly 45% of the world’s population, “live in contexts that are highly vulnerable to climate change”. These are mostly exposed areas in Africa, Asia, Central and South America and small island states. Climate impact is also magnified in cities, compounded by air pollution, heat stress and rainfall flooding. They will be hardest hit through food insecurity, water scarcity, non-communicable and infectious diseases and loss of livelihood. Climate change is contributing to humanitarian crises and there’s worsening food security and malnutrition brought on by droughts and floods.
- Climate change is already leading to the widespread disruption of natural ecosystems: There are bad consequences for plant and animal life and biodiversity almost everywhere in the world – worse than estimated in previous IPCC assessments. The report warns that half of all land species studied have already shifted their geographic ranges in response to regional climate changes. This movement of species globally is altering the make-up of ecosystems, including shifts in forest land. Climate change is also causing mass tree die-offs through its impact on droughts, and a quarter of the world’s natural land now sees longer fire seasons as a result of increases in temperature, aridity and drought.
As the chart below illustrates, these impacts on people and the natural ecosystem cannot be decoupled from one another. As 80% of the world’s remaining biodiversity is on indigenous homelands, these losses have cascading effects on people’s livelihoods, culture, food and health systems. Climate change is affecting ecosystem services connected to human health, livelihoods and wellbeing. For example, plants that we use for food and fabric are under stress – the production of multiple crops in a single year, which is common in tropical regions, will be increasingly difficult.
Source: IPCC, 2022: Climate Change 2022: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
- The negative economic consequences are large: Estimates of global economic damages and losses generally increase non-linearly with warming, and will be larger than previously anticipated. The report estimates that about 17% of global financial assets are directly exposed to climate risks, such as extreme weather events, making this an urgent investment issue for financial institutions. Here are few examples of measured economic losses that have already materialised:
- Extreme weather events cause real, direct GDP damage (e.g. Hurricane Maria caused damages totalling 225% of Dominica’s GDP in 2016). Those GDP impacts persist, sometimes as long as 10-15 years after the extreme storm;
- Declining rainfall between 1960 and 2000 alone caused a GDP gap of between 15% and 40% in affected African countries compared to the rest of the world; and
- There has been a c.10% drop in labour productivity due to days featuring extreme heat (above 32°C).
- Adaptation and mitigation need to be done simultaneously: Efforts thus far have concentrated on mitigation over adaption, primarily in an effort to not distract from the bigger mission of stopping temperature rising by reducing emissions. For instance, only 5-10% of proceeds from global green bonds goes to climate adaptation. The IPCC finds that global efforts to adapt to climate change are expanding, with clear successes in adapting agriculture, restoring ecosystems, managing water and scaling disaster-risk finance. However, it warns that not all adaptation action is the same, and some might even have unintended consequences in the form of maladaptation – adaptation actions that may lead to increased risk of adverse climate-related outcomes. An example of this is poorly deployed afforestation (the establishment of trees in an area where there was no previous tree cover).
Preparing for a warming world – why we need adaptation and avoid maladaptation
The goals of climate change adaptation are to “reduce risks and vulnerability to climate change, strengthen resilience, enhance wellbeing and the capacity to anticipate, and respond successfully to change”. According to the IPCC, in practical terms, this means investing in the Sustainable Development Goals (SDGs), like resilient farming systems, land-use planning, healthcare, (climate) education and risk-transfer schemes. It’s about creating resilience in natural systems; some examples of adaptation action include:
- Planting indigenous trees;
- Restoring plants that can remove CO2 from the atmosphere and protect coastlines like mangroves and saltmarshes;
- Helping farmers adapt to changing rain patterns by using modern irrigation; and
- Managing flood risk in cities by installing floodproofing in properties.
We need to adapt now as the window of action is narrowing faster than expected
This report shows that climate risks are appearing faster than expected and will get more severe sooner, but we have a brief window of time to avoid the worst. Key barriers of scaling have been limited resources, lack of private sector and citizen engagement, insufficient mobilisation of finance, lack of political leadership, limited research and/or slow and low uptake of adaptation science and low sense of urgency. Finance has a key role to play in closing the adaptation gap by directing capital flows to the right places. Climate finance, and particularly adaptation finance, needs to grow significantly.
What can investors do?
Recognise the current and future risks from climate change:
- What this report makes clear is that as early as the coming decade, all economic activities and financial assets will be subject to increased physical climate risks. There will be global impacts from regional food insecurity, human displacement and increased political tension in vulnerable regions. We can also expect disruption in urban economies from increased flooding and heat stress in cities. These and other physical impacts create investment risks that need to be factored into investment decision-making. Currently, data on physical climate risk is patchy at best, but data will get better and it’s going to be a salient factor for investment performance.
- Act now – this is the time to understand the climate risk your portfolio is exposed to. If you’re implementing the recommendations of the TCFD, make sure you understand your risks. If you aren’t, consider using the TCFD’s recommendations to understand how your portfolio is positioned against climate risk.
Investing in climate adaptation is an important investment opportunity:
- The insights from the IPCC underscore the need for investors to continue driving the net-zero transition to decarbonise the real economy through investments and stewardship, but also – and with equal urgency – to invest in climate adaptation. Adaptation finance will be key to limiting the disastrous impacts of climate change, particularly in developing countries, where investors can seek risk-adjusted returns combined with positive real-world impact.
- If you’re investing in climate solutions, look carefully at the geographies you’re investing in and the type of climate solutions you hold. Tools like the EU Taxonomy will help to direct more capital flows to climate adaptation activities, but investors need to have the skillset to use these tools and recognise maladaptation. Talk to your advisors and managers about adaptation (and maladaptation) and understand the options you have.
To summarise, it’s already bad and it’s getting really bad; but we can act now before it’s too late.
What are Redington doing?
Recognising the opportunity in climate adaption, we’re continuing to explore appropriate investment opportunities for our clients. Our Manager Research team are currently looking at over 20 different strategies in the natural capital space to create a high-conviction Preferred List of managers for our clients to invest in, enabling them to generate appropriate risk-adjusted returns alongside a sustainability impact. To find out more, read our blog on the investment opportunity of natural capital.