Global warming is affecting humans and ecosystems across the globe, and we need to step up to better prepare for it. That’s the key message from the just-published UN Climate Science Panel IPCC report. The findings underline the need for investors to continue driving the net zero transition through investments and stewardship. But the report makes clear that this alone is not enough.
What’s the report about?
The IPCC1 reports the scientific consensus on what impact climate change will have on the world, and what we need to do to adapt to these changes. The report was produced by 270 scientists from 67 countries, based on a review of 34,000 scientific publications. The report forms part of a series:
The IPCC released their findings on the physical science of climate change in late August 2021. The main conclusion was that global warming will inevitably reach 1.5°C in the 2030s. The report was described as ‘code red for humanity’.
The IPCC will release their report on climate mitigation in May. It will focus on how the global economy could transition to reach net zero emissions.
These three reports will be summarized into the so-called Sixth Assessment Report (AR6) 1 in October. Notably, the AR6 report will be the key reference point for international climate policy negotiations in the coming years. IPCC assessment reports are written every six to seven years; the last one (AR5) was published in 2014.
What does the IPCC conclude about climate impact?
Climate change is already leading to widespread disruption of nature. Climate impact is felt in every region, but it is particularly strong for over 3 billion vulnerable people living in the most exposed areas in Africa, Asia and small island states. Climate impact is also magnified in cities, compounded by air pollution, heat stress and rainfall flooding.
Climate impact in the next 10 to 15 years will be greater than what we are experiencing today. Every region will face more extreme weather events such as heatwaves and heavy precipitation. Ecosystems and biodiversity will be under increasing pressure. At 1.5°C warming, some ecosystems will exceed their limits of resilience, including warm-water coral reefs, the Arctic and coastal wetlands. Production of multiple crops in a single year, which is common in tropical regions, will be increasingly difficult.
Over a billion people will be subject to flood risks. Those living on small islands or mountain areas will critically lack access to fresh water. The climate impact will be felt especially by poor communities in developing countries, which had less of a role in causing climate change. They will be hardest hit through food insecurity, water scarcity, infectious diseases, and loss of livelihood.
What, according to the IPCC, should we do about it?
The IPCC observes that global efforts to adapt to climate change are expanding in ambition and scale. There are clear successes with adapting agriculture, restoring ecosystems, managing water and scaling disaster-risk finance. But overall, adaptation is piecemeal rather than systemic. Most of the attention from public policy as well as private sector action goes to climate mitigation as opposed to adaptation. A notable example is green bonds. While the IPCC considers the growth of green bond markets as a clear showcase of improved climate action, in general only 5-10% of proceeds goes to climate adaptation.
Near-term adaptation certainly is possible, but it has to move higher on the agenda, and it must go beyond building resilient infrastructure. The IPCC stresses that adaptation is essentially about the Sustainable Development Goals (SDGs) at large. It is about investing in things like resilient farming systems, land-use planning, healthcare, (climate) education, and protection and risk-transfer schemes. Only half of countries have weather services capable of providing early warning.
Finally, adaptation is about investing in nature. This means not only large-scale ecosystem restoration, but also weaving nature into cities on rooftops, green corridors, blue spaces, etc.
What does this mean for investors?
The findings underline the need for investors to continue driving the net zero transition through investments and stewardship. But the report makes clear that this alone is not enough. Investors need to consider two further areas of action.
First, from this report we know with certainty that as early as the coming decade, economic activities and financial assets will be subject to increased physical climate impacts. There will be global spinoff effects from regional food insecurity, human displacement and increased political tension in vulnerable regions in Asia, Africa and Latin America. Closer to home, we can expect disruption in urban economies from increased flooding and heat stress. These and other physical effects create investment risk that needs to be factored into investment analysis and decisions. Good forward-looking data on physical risk, in combination with in-house expertise to properly use this data, is going to be a salient factor for investment performance.
Second, climate adaptation will develop into an important space for investment opportunity, particularly in developing countries, where investors can seek risk-adjusted returns combined with positive real-world impact. Tools like the EU Taxonomy will help to direct more capital flows to climate adaptation activities. Collaboration with development banks and through blended finance approaches must be used to help trigger more private sector investments. Overall, climate finance needs to grow at least threefold – and more likely sixfold – from current levels.
How does Robeco invest in climate adaptation?
In line with the IPCC’s findings, we do see investment opportunity in the financing of climate adaptation, although this is still limited. While most proceeds in our green bond investments go to climate mitigation, we increasingly see issuance of bonds with substantial contribution to adaptation, such as flood protection infrastructure projects, disaster risk management activities, climate monitoring solutions, and engineering activities for climate adaptation.
In Robeco’s SDG framework we classify investments in natural disaster reinsurance as contributing to climate adaptation (SDG 13.1). Other sectors, such as agriculture, engineering and construction, may become eligible as and when data improves as a result of the EU Taxonomy. We concur with the IPCC’s conclusion that a broad approach that encompasses all SDGs is required for a systemic approach to investing in climate adaptation and resilience.
Webinar: Tackling climate change and green financing within global fixed income markets
In this webinar, Regina Borromeo and Michiel de Bruin, Portfolio Managers in the Global Macro team, will explain the thinking behind two distinct Robeco strategies. The Climate Fixed Income and Green Bonds strategies have just celebrated their first anniversaries, with impressive results. Both are helping to fund the climate finance gap while also offering attractive returns.
1 Intergovernmental Panel on Climate Change, https://www.ipcc.ch/
2 The Sixth Assessment Report also integrates the findings from the special IPCC reports on 1.5°C, land use and oceans, which were published in 2018 and 2019.