We are not on track in tackling global warming, but we do hold the answer. With the right leadership, the world can avoid dangerous climate change. That’s the key message from the just-published UN Climate Science Panel IPCC report.
For investors, there is an urgency to respond to the IPCC’s assessment that the financial sector is not pricing in climate risk sufficiently. The IPCC concludes that there must be a massive shift in investments in the next 5-10 years towards low-carbon energy, transport and urban infrastructure.
What’s the report about?
This IPCC1 report outlines how the global economy needs to transition to become climate neutral. Written by 278 scientists from 65 countries, it is the final report in a series of three. In August last year, the IPCC released their physical analysis, concluding that global warming will inevitably reach 1.5 °C in the 2030s. Late February, the IPCC shared their findings as to how humankind needs to adapt to the impact of global warming.2
The three reports will be summarized into the Sixth Assessment Report (AR6)3 that will be released in October this year. Notably, the AR6 report will be the key reference point for international climate policy negotiations in the coming years.
What does the IPCC conclude about limiting global warming?
The IPCC concludes that we are not on track, and that climate mitigation is challenging but feasible. Let’s consider these insights in more detail.
We are not on track. Over the last decade, global emissions rose by 12% to 59 GtCO2e in 2018. The good news is that, over this period, the average emissions growth rate of 1.3% per year was lower than in previous decades. We are using less energy per unit of GDP (-2.2% per year), and in many countries there is a decoupling of greenhouse gas (GHG) emissions from economic growth. But absolute emissions continue to rise due to the global growth of per capita GDP.
Although this growth is concentrated in Asia, it is a globally shared responsibility. Around 40% of emissions from developing countries are associated with exports to industrialized countries. The richest 10% of the world population cause around 40% of global emissions. Some of the largest growth rates in emissions are in high-income areas such as aviation (+50%), SUVs (+17%), meat (+12%) and residential cooling (+40%).
Mitigation is challenging but feasible. Despite significant developments since the Paris Agreement, climate action is insufficient and the world is still headed towards 3 °C. The key challenge is our continued dependency on fossil fuels. In many regions renewables are now a cheaper option, but still fossil fuels account for the bulk of total energy supply.
Yet the IPCC notes that we have the tools and know-how that is needed. In all key sectors, low-cost abatement options are available, and these are sufficient for halving emissions by 2030 (see table below). It is estimated that limiting global warming to 1.5 °C would cost between 2-4% of global GDP by 2050. This is a considerable, but not unaffordable cost.
Source: IPCC (2022), Climate Change 2022: Mitigation of climate change
So what is holding us back? The IPCC points to the need for clear public policies and coordinated action across all sectors. For instance, investments in renewable energy need to go hand in hand with increased storage, more network capacity and better integrated networks. When one piece stays behind, overall progress is jeopardized. The net-zero transition is about systemic transformation. In the absence of coordinated policies, progress will be slow.
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What does this mean for investors?
The Paris Agreement allocates a special responsibility to the financial sector: to align financial flows with pathways that will keep us below 2 °C. But the IPCC notes that the sector does not yet live up to this. Climate investment is around USD 600 billion per year, which is about six times short of what is needed. Notably, investments in the supply of oil and coal are higher than this, at around USD 800 billion per year.
According to the IPCC, the financial sector is not pricing in climate risk sufficiently. The reason for this is the high degree of uncertainty we’re facing. The future risks of climate change depend on our actions today. A swift net-zero transition entails investment risks and opportunities that are sharply different from a delayed-response scenario. In the absence of clear policy signals, investors tend to wait and see: there will be no massive reallocation of capital. In the meantime, financial risks are building up. The IPCC estimates the discounted value of stranded assets in the energy sector in the coming decades at USD 1-4 trillion. This amount increases with every year of delayed action.
The IPCC concludes that there must be a massive shift in investments in the next 5-10 years towards low-carbon energy, transport and urban infrastructure.
How does Robeco view the report?
The IPCC report resonates well with the insights from our 2022 Global Climate Survey. Three-quarters of global investors see climate as a strategic priority. They are working on net-zero commitments and portfolio decarbonization. Investors regard the lack of global policy agreement as the key challenge, and they underscore a lack of opportunities for investing in climate solutions.
Robeco is committed to work with clients to reach net-zero emissions by 2050, for which we developed a roadmap based on the IPCC 1.5 °C emission pathway. We recognize the challenges put forward by the latest IPCC report. For near-term reallocation of capital, we continue to develop strategies oriented to climate solutions. At the same time, for systemic transformation, we are decarbonizing portfolios and engaging with companies and governments to accelerate their transition. The IPCC report is a reminder of what a daunting task this is. But it also gives confidence that avoiding dangerous climate change is feasible, provided we work together.