What the new IPCC report means for companies and investors
The recent extreme weather events around the world — from floods to wildfires — have resulted in tragic loss of human life, and caused damage to factories and farmlands, halting transportation networks and causing power outages. These impacts have shown that companies and investors may not be well prepared for the unprecedented risks driven by climate change.
A recent report from the Intergovernmental Panel on Climate Change (IPCC) provides comprehensive knowledge on climate change and can be used by companies and investors to enhance their climate resilience. Released in early August 2021, this report is the first instalment of the IPCC sixth assessment Report, Working Group I: The Physical Science Basis.
As well as being the starkest warning yet about the inevitable effects of climate change, the new report demonstrates the potential for huge risk reduction, but only if emissions reductions are rapid, ambitious and sustained, and investment into resilience decisive.
Companies and investors have a key role to play by adopting strong emissions reduction targets and establishing robust strategies for reducing risks from climate impacts — and then following through.
Here are six things the private sector needs to know about the newest climate science, its implications for businesses, and what can be done to build climate resilience:
1. Climate Change Impacts Will Only Get Worse — How Much Worse Depends on What We Do Now.
Because of inertia in the geophysical system, global warming and most other/related climate hazards will continue to intensify for at least two decades even if global emission reductions were achieved immediately and maintained. Some hazards, such as sea level rise, would need at least several centuries to reverse course.
Needless to say these impacts will be disruptive to business as well as devastating for human life. One estimate puts the total value of financial assets at risk from business-as-usual at $24 trillion — and no community, person, or firm is without climate risk.
As our colleagues in the Science-Based Targets initiative put it, this report is a “final call to decarbonize.” Strong, rapid and sustained global emission reductions would lead to much smaller changes in climate hazards after 2040, and better air quality within years.
This means companies and investors should not only have ambitious mitigation targets to achieve net-zero emissions at least by mid-century, thereby reducing disastrous impacts in the long term, but should also proactively measure and manage physical risks from climate change to be more resilient in the next few years and decades.
There are abundant resources available for companies and investors to prepare. For example, just as the Science-based Targets Initiative provides a clearly defined pathway to reduce emissions — an urgent task — the Task Force on Climate-related Financial Disclosures (TCFD) recommendations provides a solid framework and guidance for climate risk disclosures. Investors use disclosures in investment decisions to help maintain fair and efficient capital markets, rewarding companies who enhance their resilience with lower costs of capital and an accompanying edge on competitors.
2. Reference IPCC’s List of 35 Physical Climate Hazards.
Risk assessment guidance from corporate disclosure initiatives provide a valuable set of publicly available resources to guide climate-related risk assessment and disclosure. But our research shows that some hazards highlighted by previous IPCC reports are missing or receive little attention from the guidance. Companies and investors that rely on these resources may therefore overlook aspects of physical climate risk.
For the first time, the new IPCC report shares a comprehensive list of 35 physical climate hazards, grouped into seven categories: heat and cold; wet and dry; wind; snow and ice; coastal and oceanic; open ocean; and other. Companies and investors should reference this list and identify those that are material to their sector and value chain footprint when assessing physical climate risks. Corporate disclosure initiatives should integrate this list into their latest guidance documents.
3. Anticipate Disruption, Not Continuity.
With further global warming, all regions will experience more frequent and more intensive hazards than they are already exposed to — and new hazards could come into play, too.
For example, the type of heatwave that might have come around once in the 1850-1900 period is now occurring much more frequently — about every ten years — and is even more intense (1.2 degrees C / 2.2 degrees F hotter) on a global land average level.
Even if we can limit global warming to 1.5 degrees C, this level of heatwave will still become more frequent, occurring about every six years; if global warming reaches 4 degrees C, this will become an annual event, and significantly hotter (5.3 degrees C / 9.5 degrees F) on a global land average level.
This means companies and investors cannot rely on existing observational records for physical risk assessment since the future could be significantly different from the past. Instead, they should integrate the potential impacts of climate change on hazards into risk assessment.
For example, when planning sites and operations companies may begin applying risk management strategies not just to sites where extreme events were predictable — like heat waves in the American Southwest or fires in Siberia — but more comprehensively across their value chain where those events weren't previously observed. Scenario analysis (see below) can also help.
4. Use Scenario Analysis to Test Resilience and Be Ready for Different Futures.
This IPCC report uses a core set of five new emissions scenarios to drive climate model projections in the climate systems: two high emission scenarios (SSP3-7.0 and SSP5-8.5), one intermediate emissions scenario (SSP2-4.5), and two low emissions scenarios (SSP1-1.9 and SSP1-2.6). Only the lowest emissions scenario (SSP1-1.9) suggests more than a 50% chance to keep global warming below 1.5 degrees C with limited overshoot. This scenario requires CO2 emissions to decline to net zero around 2050, followed by net negative CO2 emissions.
The Task Force on Climate-related Financial Disclosures recommends companies and investors use scenario analysis to identify and assess the potential implications of a range of plausible future states. As physical climate hazards from climate change become greater in direct relation to increasing emissions, companies and investors should use at least one of the high emission scenarios to assess their exposure and resilience to those hazards.
5. Collaborate with the Climate Science Community and Other Stakeholders.
Some climate hazardous events are interconnected, such as the heatwaves, drought and wildfires faced by western North America in the summer of 2021. With higher global warming, compound events are projected to be more frequent and widespread, particularly concurrent heatwaves and droughts.
The potential impact of compound events could be unprecedented as multiple hazards can happen in sequence over time (temporally compounding) and in multiple connected locations (spatially compounding), aggregating to an unexpected catastrophe worse than the sum of the parts.
With few or no comparable historical record for some compound events, companies and investors may have limited data and scientific knowledge to make decisions associated with compound events. They should collaborate closely with the climate science community, governments, local communities, and other stakeholders to share important information across different knowledge domains. This will help facilitate risk management and ensure it is achieved across different levels of decision-making, ultimately increasing climate resilience across society.
6. Integrate Climate “Black Swan” Events for Business Resilience.
Low-likelihood, high impact events — such as large precipitation changes, additional sea level rise associated with collapsing ice sheets, or abrupt ocean circulation changes — could occur even "at levels of warming within the very likely range,” according to the IPCC report. However, the chance of these events increases with higher global warming.
For example, sea level rise is projected to be in the range of 0.63 to 1.01 meter (2.1 to 3.3 feet) by 2100 under the highest emissions scenario, SSP5-8.5, relative to 1995-2014. But sea level rise above that range, including up to five meters (16 feet) by 2150, cannot be ruled out due to uncertainty in ice sheet processes.
With this high level of sea level rise, global land area loss in coastal regions would exceed the equivalent of one-third of the total area of the United States. Companies and investors can reference existing resources to improve business resilience and responses to these events, for example, an international standard for business continuity management (ISO 22301).
Risk Avoidance is Still Possible
The new IPCC report provides rich information for companies and investors on their journey on measuring and managing physical risks from climate change. As the world today is already 1.09 degrees C hotter than 1850-1900, some risks are unavoidable in the near term.
But now is the time for companies and investors to adopt ambitious emissions reduction targets and establish robust physical climate risk management. Enhancing climate resilience will strengthen the bottom line for the private sector while also bringing better jobs to communities and solidifying pensions for workers.