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It’s Time For A New Approach As IPCC Report Doubles Down On The Need For Rapid Climate Action

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The IPCC has released its latest update on the science underlying climate change with the Sixth Assessment Report ‘Climate Change 2021: The Physical Science Basis’. Carolina Vera, Vice Chair of WGI of the IPCC says, “The report clearly shows that we are clearly already living the challenges created by climate change.”

While scientists have been exploring the science linking weather to climate change since the 1970s, it has always been considered somewhat theoretical. Today we are not only seeing the impacts of climate change playing out on the front page of papers around the world, but the science has progressed and is sufficiently robust that the connection can be clearly made and scientifically supported.

IPCC Working Group I Co-Chair Valérie Masson-Delmotte highlighted the importance of the progress made in our understanding of climate sensitivity, which describes how the climate responds when you double the CO2 in the atmosphere. She said, “With recently growing understanding of feedbacks, the range of climate sensitivity has been reduced and so we have a more accurate understanding of climate response. It’s one of the many examples of the rate of the technical progress which is informing the latest report.”

The international Paris Agreement targets temperature increase of no more than 2 degrees Celsius above pre-industrial levels, with a goal of 1.5 degrees. But the report projects that climate change impacts will increase in all regions and significant impacts will be felt even at 1.5 degrees – at 2°C of global warming, heat extremes are expected to more often reach critical tolerance thresholds for agriculture and health and for the world to see more ‘high impact’ events.

Such events, with knock-on effects on supply chains, livelihoods and industries, come with significant costs attached. This is important because approaches to try to limit emissions, from taxes to cap and trade, are based on the idea that pricing externalities can change corporate behaviour. These approaches are all built on the market paradigm however, and seem to ignore that climate change was described as ‘the greatest market failure’ according to economist Sir Nicholas Stern. Much lip service is being paid today to ESG investment, to growing sustainability concerns and the circular economy but the underlying dynamics are showing little sign of change.

In July for example, the World Benchmarking Alliance launched its Oil and Gas Benchmark, which ranked the top 100 most influential oil and gas companies on their transition., using the IEA’s Net Zero Emissions by 2050 Scenario. What it showed was a system wide problem of lack of accountability and action. If oil and gas companies exploit the fields already approved for production, those actions alone will consume the 1.5 degree carbon budget by 2037.

The IPCC report says, “From a physical science perspective, limiting human-induced global warming to a specific level requires limiting cumulative CO2 emissions, reaching at least net zero CO2 emissions, along with strong reductions in other greenhouse gas emissions.” For this to be successful there will need to be significant and rapid action and that means a large scale global transformation of finance, business and economics. 

Kate Levick, Associate Director, Sustainable Finance at think tank E3G says, “The IPCC’s messages make sobering reading for all financial decision-makers. Recent shifts towards net-zero, resilient investment by private sector firms and governments must now be rapidly accelerated, now that we have an updated understanding both of the risks involved and of the limited time window to address them. The financial system must support the economic transformation that we need.”

Net zero can no longer be a future target that countries and companies aspire to, but a goal with concrete plans to achieve it. As Harald Heubaum, a climate policy expert at at SOAS, University of London says, “There is no avoiding the bad - more climate impacts like floods and wildfires are already built into the system. But we can prevent the ugly if we're willing to intervene more effectively to realign the financial system now.”

The UN-convened Net-Zero Asset-Owner Alliance, which consists of investors with $6.6 trillion in assets under management (AUM) are urging investors, companies, and governments to act definitively to limit temperature increase by adopting transformational measures that will rapidly reduce carbon emissions. This includes actions such as setting interim carbon targets of 2025, improving climate risk reporting, the development of new models and approaches in business operations.

This is part of the growing transparency agenda, which aims to build trust and understanding through accountability for governments and corporations. Transparency is the basic requirement for understanding impact in terms of actual GHG emissions, climate actions and investment. Only when we have that information can we be sure that we are putting our efforts in the right places in the right ways. It is also critical in building trust in a negotiation environment that can be very contentious.

The market for sustainable finance continues to grow with approaches ranging from green bonds, to ESG to clean technology funds. It’s now moving significantly into the corporate debt market. Ares Management have just announced £1 billion in debt facilities for the RSK Group, the UK’ s largest private multidisciplinary environmental business.  The new debt facilities include an annual margin review based on the achievement of sustainability targets focused on a combination of carbon reduction and improvements to health, safety and ethics, drawn up in a route map based on the United Nation’s Sustainable Development Goals.

This type of finance highlights the potential for a significant shift in financial approach but one that needs to be scaled up rapidly. But that won’t happen without the appropriate frameworks in place, from central banking focus on climate risk, mandatory climate risk reporting, national targets with concrete actions and a wider focus from investors and corporates on the impact of externalities and on return beyond purely financial measures.

Stew Horne, Head of Policy at the UK’s Energy Saving Trust, says, “The climate emergency is with us now and the clock is ticking. With the eyes of the world on the UK as we build up to COP26 in November, the UK government must now show real leadership by recommitting to delivering a greener recovery. The transition to a greener, healthier, and more resilient future is a necessity, not an option. Today’s IPCC report emphasises that there is really no time to lose. We must act now.”

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