by Jamie Bonham.

The IPCC’s most recent report lays out the critical challenges ahead

During a summer of unprecedented heatwaves, raging wildfires, and extreme flooding events, it is no wonder that the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report has attracted so much attention. The report follows other surprising developments this year, such as the International Energy Agency releasing a net zero scenario that called for no new fossil fuel projects or the EU releasing its ambitious Fit for 55 plan. The amount of coverage the IPCC report has garnered is strong evidence that a change is on the horizon, and a sign that we might finally be ready globally to treat climate change as the existential threat that it is.

The report contains many critically important facts and figures, and covers so much ground in its 3,949 pages that our analysts at NEI are now still carefully poring over its many insights. However, perhaps the arguments attracting the most immediate attention are the report’s statements that human-induced climate change is not only an unequivocal reality, but that the extreme weather events we are experiencing are a direct result of human-induced climate change and are only going to increase in frequency and severity. That link has never been made as clearly as it has in this report—and for anyone experiencing these events firsthand this summer, it is a statement that hits home. Other findings point to the sobering fact that some of the impacts of climate change, even if we achieve our net zero goals, will take millennia to reverse. Also alarming is the finding that our window to avoid exceeding the 1.5°C climate threshold (a Paris Agreement goal to limit global warming to 1.5°C above preindustrial levels) is roughly 10 years shorter than we thought. The IPCC’s Sixth Assessment Report leaves little room for doubt about the severity of the potential impacts of climate change or about its main cause—human activity. Furthermore, what is also clear is that constructive actions we take now will absolutely have a positive impact.

In some ways, reactions to the report are puzzling—scientists were telling us as far back as 2007 that they were 90% certain that humans were the cause of climate change. That was enough certainty for many of us as responsible investment professionals to integrate climate change into our ESG engagement and integration work. In 2013, that scientific certainty rose to 95%. Again, considering the potential impacts, that should have been enough to spur wider action. So, the principal question remaining is whether the blunt language of the Sixth Assessment Report leads to a different outcome—will it make any difference? Our assessment is a qualified yes.

Policy impacts

Language matters, and in the past scientists have used the language of confidence and likelihood (“very high confidence” or “very likely”) to express scientific realities—namely the difficulty of stating that anything is 100% certain. This may have been seen as equivocating in past reports and allowed a sliver of doubt to colour interpretations of their findings. The fact that we now have the world’s most eminent climate scientists using the term “unequivocal” to describe the link between human activity and climate change is monumental.

Anyone who flatly didn’t trust the scientific consensus previously is unlikely to be moved by this change in tone—if you don’t believe in science you likely don’t care what a scientist has to say. Still, this clear and unambiguous language will provide the political justification needed by governments that believe in the science to implement increasingly stringent climate policy. It is important to note that while the IPCC is a scientific body, the report (and the language within it) has been agreed to and signed off on by all the IPCC’s signatory countries. The report is absolutely clear—the longer we wait, the more extreme future policy actions will need to be, and the greater the risk that we start to encounter dangerous tipping points.

We anticipate much bolder government action as a result. Companies and investors should be prepared to protect themselves from and embrace the opportunities of a rapidly shifting policy environment. We hope that the Sixth Assessment Report will remove the uncertainty surrounding the permanency of climate policies and lock in certain foundational principles (such as carbon pricing or the low carbon fuel standard). It will be very difficult for future governments to walk back progressive climate policies in the face of the IPCC’s crystal-clear language.

Program impacts

As mentioned, there is a lot to unpack in the report, and there are still two more installments to come (one on impacts and adaptation, and the other on mitigation opportunities). However, there are already several key findings that have a direct impact on our ESG program. Consequently, it is clear we all need to assess our actions at a high level against the urgency of the IPCC’s findings.

Key finding #1: Policy is critical

We think that the Sixth Assessment Report will give governments the resolve to overcome internal resistance against implementing much-needed policy changes. The role of responsible investors in making it clear that we support strong and decisive policy at this juncture is crucial. At NEI, we are already pushing policy levers in multiple areas, and this work will take on added importance in light of the report’s findings.

Key finding #2: Net zero is necessary

Not all of the news in the report is bad. One theme that comes across very clearly is that we are not powerless in the face of climate change. There are concrete actions we can take that will help mitigate its worst impacts. In particular, the report affirms the importance of the net zero agenda. Actions that align with a net zero trajectory will be critical and should be pursued as our first line of defence. For NEI, that affirms the importance of our focus on driving a net zero agenda in our portfolios. Simply stating “net zero” is easy, but our focus as investors needs to be on making those commitments real—the IPCC report will help drive the urgency of these engagements. In particular, the importance of near-term emission reductions was made abundantly clear, so any net zero commitment must be accompanied by robust short-term targets. Investors should not tolerate plans that do not have that near-term ambition and make their displeasure known at AGMs by voting against key board members. The IPCC report comes after a proxy season when investors already voted against management on key climate-related proposals in greater numbers than ever before. Companies might be in for an even wilder ride at their next AGMs if they don’t focus on their net zero game.

Methane was specifically identified as a key pollutant that needs to be addressed in the short term. This is because of the much stronger near-term impact methane has on global warming—some estimates have it as 80 times the warming impact of CO2 over the first 20 years of its life (methane breaks down in the atmosphere so it becomes less potent over time). This highlights the importance of our focus on reducing methane in the oil and gas sector through various policy initiatives, collaborative working groups, and direct company engagements. Methane reduction is also a concrete action that represents a least costly option for the industry.

Key finding #3: Physical risks cannot be ignored

The report provides increased certainty around the projected impacts of climate change, and the regional distribution of those impacts. This will help companies and investors assess their exposure to the unavoidable physical risks of a changing climate. The report was clear that adaptation is not optional—we have crossed a threshold to where impacts are inevitable. The physical impacts of climate change, and how companies should be planning to adapt to these changes, have been poorly understood and not given the necessary amount of attention in company climate reports and investor engagements (ours included). Companies and investors alike will need to start assessing exposure to these risks. One of our sub-advisors, Impax, has shown what this work can look like in its report on physical climate risks (PDF).

Key finding #4: Impact brings opportunities

The stark, unvarnished language of the report removes any uncertainty about the need for a rapid and complete transformation of our energy system and associated infrastructure. From building retrofits to renewable energy to electric vehicles, investors need to turn their focus toward supporting the growth of this new energy ecosystem. As well, the report makes it clear that companies and investors need to be thinking critically about adaptation (and the many opportunities that will be linked to this theme). This confirms the investment case for our impact suite of funds, which we are continuously looking to grow.

There is much more to the IPCC’s Sixth Assessment Report, but for now we can look at the document as both an affirmation of the focus we have placed on the energy transition and a reminder that we need to do much better. As we approach the 26th UN Climate Change Conference of the Parties (COP 26), we think this report will help strengthen the resolve of governments, companies, and investors alike to take the bold steps needed to drive the transition. We all need to step up our game.