The IPCC’s Sixth Assessment Report: urgent investor action required

With unprecedented temperatures, wildfires on multiple continents and hundreds dying around the world from flooding events, it barely needed confirming that the climate has changed and is continuing to do so. Nonetheless, we got confirmation of exactly that last week in the form of the collective conclusion of the world’s scientists in the Sixth Assessment Report (AR6) from the Intergovernmental Panel on Climate Change (IPCC). The IPCC is a UN body that was set up to assess the emerging evidence surrounding climate change and the role of humans in driving it.

This monstrous report is a sobering insight into how humans have been a key driver in the rapid warming of the atmosphere, ocean and land, and have influenced the unprecedented rise in sea levels, precipitation and more. We’re already at 1.1°C of warming above pre-industrial levels (hence the significant impacts already seen) and our emissions already guarantee further warming. The IPCC argues for rapid decarbonisation of the world economy. Even if that is delivered, their most favourable scenario predicts warming beyond 1.5°C (i.e. beyond the goals of the Paris Agreement), which will have significant additional consequences.

What are the key findings?

The report is an assessment of the physical science behind climate change, the last of which was released by the IPCC 8 years ago. It’s a product of 234 authors from around the world who reviewed thousands of papers on recent scientific studies, and it represents a real step ahead in the world’s understanding of climate change.

Rather than viewing climate change as a threat looming on the horizon, the IPCC’s report talks about climate change as a thing of the present – which chimes with the experience of the many people who are already suffering the effects of extreme weather events. We witnessed the very dramatic heatwave in Canada earlier this year, devastating floods in Germany and China recently, as well as the wildfires currently blasting through California, Greece and Turkey. These are exactly the kind of extreme weather events that the IPCC previously said would become more frequent and intense. We seem to be living through the IPCC’s predictions in real time. The chart below illustrates this well; things that used to occur once a decade now occur every 3 years, and if we don’t control CO2 emissions soon, they’ll soon become annual occurances.

The report outlines, with much more certainty than we’ve ever had, what’s driving climate change, how human actions impact on it, what the effects of it will be and the ways in which we can avoid some of the worst consequences. It goes into far more detail than any of its predecessors in describing the effects of climate change that we are actually seeing and is far more assertive on actual climate impacts than previous editions. It uses multiple lines of evidence: the physical lived experience as well as models and projections.

Its conclusions make for pretty grim reading:

1. Faster warming: emissions of greenhouse gases from human activities are responsible for approximately 1.1°C of warming since 1850-1900 and, averaged over the next 20 years, global temperature is expected to reach or exceed 1.5°C.
2. Every region is facing increased changes: climate change is affecting every region on our planet. For the first time, the AR6 provides a more detailed regional assessment of climate change, including a focus on useful information that can inform risk assessment, adaptation and other decision-making. It also provides a new framework that helps translate physical changes in the climate – heat, cold, rain, drought, snow, wind, coastal flooding and more – into what they mean for society and ecosystems.
3. Sea level is rising at an unprecedented rate: with sea level rise rapidly accelerating, there’s a high likelihood that sea levels will rise two meters by 2100. By then, coastal events that used to occur only once a century may be at least annual occurrences.
4. Human influence on the past climate: it’s indisputable that human activities are causing climate change and making extreme weather events more frequent and severe. The evidence is clear that CO2 is the main driver of climate change, even as other greenhouse gases and air pollutants also affect the climate, and the report calls human influence “completely unequivocal” in causing climate change, which isn’t something the IPCC have stated as boldly before.
5. Human influence on the future climate: importantly, human actions still have the potential to determine the future course of climate change. The report explains that strong, rapid, sustained reductions in CO2 and other greenhouse gas emissions are required to limit global warming. Based on scientists’ estimations of the world’s carbon budget, even if countries were to drastically reduce their greenhouse gas emissions now (and none of them are showing a consistent downward trend of any sort), the world would likely exceed a 1.5°C temperature rise above pre-industrial levels within the next 20 years. For a 1.5°C  target to be achievable, every country would need to be at net zero by 2050.

These are serious assessments that the IPCC will publish ahead of the COP26 climate talks in Glasgow this November. No doubt its findings will be key in informing the policy outcomes of the conference.

What are the implications for investors?

Given the findings in AR6, it’s critical for investors to start considering the physical risks associated with climate change immediately. AR6 highlights the increasing flood risk, which is something we’ve seen noted by managers in response to our 2021 Responsible Investment Survey to be influencing their investment decisions. The Institutional Investor Group on Climate Change (IIGCC) has previously released some guidance for asset owners in assessing physical risk, which can be found here.

The report is likely to be actively considered during the upcoming COP26 conference, which will likely have implications for transition risk. Although the findings are not new, the increased certainty with which scenarios are predicted should inevitably lead to a response from many of the 195 UN governments that approved the report, increasing the speed of the transition to a less carbon-intensive economy. The UK has a clear timeline for the introduction of mandatory climate reporting against the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), but the report may provide the impetus to other nations to make TCFD reporting mandatory too. Regarding more stringent regulations such as a tax on carbon, all eyes will be on what comes out of COP26.

Governments are not the only source of pressure that investors are facing and will continue to face as wider society grows impatient with a lack of clarity over national strategies for decarbonisation. Pressure from civil society has already changed how pension funds approach responsible investment. Now, the focus will be on the implementation of any climate commitments, requiring investors to have plans for the carbon transition.

Investors need to act now to protect their beneficiaries and wider society.

One thing that investors can start to do immediately is portfolio decarbonisation. Reducing exposure to high-emitting sectors will have tangible effects on climate risk. In addition, as data improves, it will be possible to monitor portfolio emissions over time. Conversely, and more importantly, investors can explore the opportunities associated with the climate transition too, contributing to real-world emissions reduction whilst generating positive returns.

But that’s not all, as the IIGCC has highlighted in its response to AR6: engagement is a key part of investors’ contribution to the climate transition. However, to be successful in engagement, the industry needs to work together. Through the power of shared ownership, investors can combine and amplify their engagements to make them more effective. One such example of this is Climate Action 100+, an investor initiative that’s targeting the world’s biggest greenhouse gas emitters, monitoring progress and setting expectations for specific sectors.

As part of our net-zero commitment, we’re focused on delivering tailored investment advice aligned with the goals of the Paris Agreement. We’ll do this by following our 7-point climate action plan:

Helping our clients articulate their own climate-related objectives – allowing them to achieve their investment goals while contributing to real-world economy decarbonisation.

The challenge

The report brings both transition and physical risks to light for investors, expressing a need for urgent action. As Inger Andersen, Executive Director of the UN Environment Programme, said at the IPCC press conference which marked the launch of the report: “it’s time to get serious because every tonne of CO2 emission adds to global warming.”

Bringing forward action makes sense for both our planet and our investments. We’re already seeing the physical impacts of climate change around the world, and these will have financial impacts on our portfolios. With significant change required of the world economy comes significant change required of  investments too. We need governments to act, but we must act too. We stand ready to work with clients on the complex challenges that climate change will bring over the coming years.

To find out how we can support you in decarbonising your portfolio and contributing to the real-world transition to a low-carbon economy, please get in touch: edwin.whitehead@redington.co.uk

Thanks to Edward Phelps, Celine Grace Legaspi and Paul Lee for their contribution to this blog.

Unless indicated, these are the views of the author’s and may differ from those of the firm.