Key takeaways for investors from the IPCC synthesis report

While there is sufficient global capital to stave off the worst effects of climate change, investment in reducing emission and adapting to the effects of a warming world would need to increase “many-fold” this decade, a major report released on Monday by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) finds.?

Society still has the ability to limit global warming to 1.5°C (2.7°F) above preindustrial levels – the Paris Agreement target – provided it reduces greenhouse gas emissions both rapidly and immediately across every sector of the global economy, according to the report, which summarizes a decade’s worth of climate science. The world’s listed companies are on course to increase warming by 2.9°C, MSCI’s latest Net-Zero Tracker shows .?

“The latest IPCC report tells us that society has both the opportunity and the money we need to stave off the worst climate risks, but that doing so will take action at pace and breadth we’ve yet to see,” says Sylvain Vanston, MSCI’s executive director for climate change research. “We know how to reach net-zero, however challenging it is. We also know where the roadblocks are. Now it’s time to act.??

Vanston spoke with MSCI Communications about some of the takeaways from the IPCC report for investors and other capital-markets participants.?

The report makes clear the critical role of capital and international cooperation in addressing climate change. What does this mean for investors??

Vanston: While climate investment has grown, the report notes it would need to increase three to six times above current levels from both public and private investors between now and 2030, which means billions of dollars more for both mitigation and adaptation, including for green technologies. Two things about that stand out. One, as the report shows, is that multiple opportunities for scaling up climate investment exist already, while others are becoming increasingly feasible. Investors, as the IPCC notes, continue to need clear signals from governments, including in both public spending and regulatory support that improves the risk-return profile of investments. The other is that both policymakers and the financial sector can address the underpricing of climate-related risks, which includes at last putting a price on carbon, and by identifying mechanisms to boost climate finance in developing countries.??

So limiting warming to 1.5°C? degrees remains possible??

Vanston: Only if we reduce global carbon emissions by nearly 50% this decade from 2019 levels, which of course is an extremely tall order. Otherwise, projected emissions from existing fossil-fuel infrastructure alone would burn through the remaining global carbon budget for keeping warming within 1.5°C by the early 2030s. Limiting warming means much more investment in renewable energy, carbon capture and storage that reduce emissions on the supply side, together with electrifying everything that can be electrified, greening of buildings, and sustainable agriculture, aviation, shipping, land use and production that can drive down emissions on the demand side. That’s not the case right now. The IPCC notes that more public and private money still flows to fossil fuels than to climate adaptation and mitigation. The current energy crisis increased fossil subsidies.??

What is the role of governments??

Vanston: Governments everywhere need to translate net-zero into actual outcomes via clear policy frameworks. That includes persuading voters of the urgent need for climate action like never before – the IPCC calls for “mainstreaming climate action across policy domains.” There too, investors can play an indispensable role by using their leverage to call on government officials and regulators to put forward policies that speed reductions in global emissions this decade. That’s why, for example, you see the Net-Zero Asset Owner Alliance calling on members to align their policy advocacy with a 1.5°C goal, and to drop membership in trade associations or other groups that don’t share that commitment. Governments and international financial institutions also play a critical role in creating incentives to boost the flow of climate finance to developing countries by reducing risk.??

What does the report say about the risks of inaction??

Vanston: That every tenth of a degree of warming will intensify hazards to human well-being and the health of the planet. Think heat, drought and rainfall and extreme weather, together with rising sea levels. All that means greater risks to nature and biodiversity, flooding, falloffs in food production, and disease, and the economic disruption and limits on global growth that ensue. Ultimately, the equation for investors is clear: address transition risks today, or face much more severe and irreversible physical risks tomorrow. This is why the science shows that humanity’s best outcome is to reduce global emissions to net-zero as quickly as possible. On the bright side, the IPCC notes that if we reduce global emissions deeply and over time, we can expect improvements in atmospheric conditions within a few years in some instances, although damage is already underway and will extend far into the future.?

Can we overshoot the 1.5°C threshold and then return to a net-zero pathway thereafter??

Vanston: Yes, in theory, but as the IPCC notes, the more we deviate from a 1.5°C pathway, the higher the physical risks, some of which would be irreversible. Some climate tipping points cannot be tipped back into a stable state. When species disappear, for example, there is no coming back. We also would need to deploy more carbon removal, so that we would remove more CO2 from than the atmosphere that remains in it from all the residual carbon we’ve emitted. There is currently no viable approach for this. And the more the world warms, the less effective the adaptation that countries and investors pursue today will be.?

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