Companies and governments have a very short time to reduce their exposure to the unavoidable climate risks facing the world, according to the second installment in a series of sobering climate reports by the U.N.’s Intergovernmental Panel on Climate Change, or IPCC.
The Feb. 28 report from the Intergovernmental Panel on Climate Change, Climate Change 2022: Impacts, Adaptation and Vulnerability, is the most comprehensive study to date of how communities, countries and companies are exposed to climate change-related physical risks, and how they must adapt to lessen the damage. Past IPCC findings have driven important climate-related policy changes and investor engagement.
What do companies and investors need to know about the nearly 3,700-page report garnering headlines around the globe? We outline four key takeaways below.
Climate-related losses and damages are inevitable, but some risks can be moderated with concerted and cross-sectoral adaptation.
As the IPCC first suggested in August 2021, the world is likely to at least temporarily exceed 1.5 degrees Celsius warming, relative to preindustrial levels, in the next couple of decades. That 1.5 degrees C of warming is the threshold above which scientists expect climate change to have the worst impacts. The IPCC’s new report measures what those impacts could look like across the world, and what actions can be taken to prepare for physical risks. Losses to ecosystems, biodiversity, infrastructure and property are unavoidable but can be lessened through action.
Roughly 3.3 billion to 3.6 billion people — or 45% of the world's population — now live in "contexts" that are highly vulnerable to climate change, the IPCC says. The world's physical infrastructure is also at particular risk from sea level rise, storms and flooding. Under a business-as-usual high-emissions scenario, up to US$14.2 trillion worth of assets in coastal floodplains are projected to be at risk of extreme flooding by the end of this century, the report states.
Financial institutions are also exposed to climate risks. About 17% of global financial assets are directly exposed to climate risks such as extreme weather events, the IPCC wrote.
Scientists say the world still has feasible adaptation options to reduce risks to people and nature — but the effectiveness of those options will diminish as the world warms. This is why the world must simultaneously adapt to climate change and slow the pace of global warming by quickly reducing greenhouse emissions. Both areas need full-scale attention and advancement.
Natural ecosystems that communities rely on for tourism, food and trade are also vulnerable to climate change. For example, sea level rise has eroded the beaches of coastal settlements across Catalonia, Spain, and hurt tourism, which had historically contributed about 11% of the region's GDP.
The report also notes that climate risks can differ by location. Let's take the U.S. as an example.
According to S&P Global Trucost data, water stress is the biggest climate-related risk facing the most populous U.S. counties under a moderate scenario for projected temperature increases by 2050. This is particularly true for counties in Arizona and California, which are suffering from an extended drought. While counties in western states tend to face more heat-related and water stress risks, coastal counties are at increased risk from sea level rise and hurricanes.
Climate change will increasingly disrupt supply chains as global temperatures rise.
Projected increases in flooding, sea level rise and extreme weather events pose big threats to supply chains, from transportation and production infrastructure to the communities and ecosystems underpinning those supply chains.
Flooding and storms can disrupt trains and roads for transporting materials and products while many of the world's shipping ports and airports are at risk of flooding due to sea level rise. Under a 2-degree C warming scenario, the number of airports around the world at risk of storm surge flooding would increase from 269 to 338, the IPCC said.
In Europe alone, climate risks to transportation infrastructure could increase from €0.5 billion to €10 billion by the 2080s. Moreover, about 7.5% of roads and railway assets globally are exposed to risk of extreme flooding and could face up to US$22 billion in damages annually from cyclone winds and flooding. Changes in rainfall and temperature patterns could prompt an increase in landslides, sinkholes and unexpected freeze-thaw events that further threaten transportation infrastructure. High river flows in the U.K. could lead to one in 20 bridges being at high risk of failure by the 2080s.
Climate change will also put pressure on food production and will progressively weaken soil health and diminish ecosystem services such as pollination and natural pest control, the report said.
Lower- and middle-income countries that are often the starting point for supply chains are especially vulnerable because they lack the resources and systems needed to adapt, the report said. More financing directed at these countries and communities is needed.
Current global financial flows for adaptation are insufficient, from both public and private sources.
While adaptation planning and financing have increased globally in recent years, progress is uneven and not keeping pace with climate change, the IPCC found.
The IPCC sees a role for the private sector in mobilizing adaptation-related financing. However, there is a limited number of financing instruments currently available, and private financing for adaptation has typically been directed to huge projects that may not necessarily address local needs, according to the report.
Unlike emissions reductions that can be tracked, adaptation investments generate returns through estimated avoided losses, which are difficult to measure, the report said. The private sector can contribute to adaptation through innovative technology, designing resilient infrastructure, and implementing improved information systems, according to the IPCC.
"The private sector can be seen as a 'supplier of innovative goods and services' to meet the adaptation priorities of developing countries with expertise in technology and service delivery," the IPCC wrote. Future investment opportunities to support climate-resilient development are in water resources, agriculture and environmental services, the report said. Other examples of investment opportunities include weather and climate services and water purification and treatment, the IPCC wrote.
Adaptation plans require systems-level thinking across environmental and social factors.
Effective adaptation plans will need to weigh impacts on ecosystems, communities and overall long-term planetary health to avoid negative unintended consequences, the IPCC wrote. All too often, according to the report, adaptation focuses on short-term solutions and ignores the longer-term implications for nature and society. For example, planting trees in areas that would not naturally support forests can destroy local biodiversity, create water and food supply challenges and increase wildfire risk.
The report also reinforces one of the key ESG themes that S&P Global has identified for 2022 — the need to ensure a just and equitable climate transition.
Leaving equity and justice out of climate transitions could lead to maladaptation, aggravated poverty and reinforce existing inequalities and entrenched gender bias, the IPCC wrote. This could slow, rather than accelerate, the pace of a sustainable transition. One way to help ensure an equitable transition is to involve Indigenous and marginalized communities in adaptation planning and implementation. The IPCC report puts a new emphasis on the valuable knowledge that Indigenous and local communities have about the land and ecosystems they inhabit. The IPCC report detailed more than a dozen examples of how local communities’ knowledge and traditional practices directly apply to issues such as food security, water use and climate forecasting.
The final chapter of the report acknowledged that a global response to climate change cannot succeed without the collective support of society, which also drives political will. In addition, financial institutions like banks, institutional investors and asset managers can pressure companies to change and lobby governments to create climate-friendly policies and incentives.
Financial actors increasingly recognize that generating long-term, sustainable financial returns depends on "stable, well-functioning and well-governed social, environmental and economic systems," the IPCC wrote.
