The recently published United Nations (UN) report on climate change generated alarming headlines worldwide. Here, Pat Sharman, Country Managing Director, UK, summarises the key findings of the report, and highlights some of the key issues for pension scheme trustees to consider.
Quick read summary
- The UK pensions market is the third largest in the world, overseeing over £2.5 trillion of assets. Pension schemes are therefore in a unique position to drive change.
- Temperature changes outlined in the report confirm that weather extremes such as heatwaves, droughts, heavy rainfall, and tropical cyclones, have become much more prominent since the 1950s.
- These extremes are expected to become more frequent.
- Cutting greenhouse gas emissions to net zero is just the first step to stabilising the earth’s long-term temperature.
- More focus on corporate responsibility – companies will be encouraged to increase own efforts to become carbon neutral and launch their own green initiatives.
- The report presents a clear case for seizing the initiative and collectively taking the steps necessary to prevent climate disaster.
- For pension schemes, the IPCC report also reinforces the importance of measuring and monitoring the carbon emissions from their underlying pooled fund and segregated investments.
What has happened?
In August, the Intergovernmental Panel on Climate Change (IPCC) released its Sixth Assessment Report on the science of global warming, and the first report published since 2013. Some of the key findings of the report made for disturbing reading, and the UN’s Secretary-General, António Guterres, called it a “code red for humanity”. The findings were reviewed by representatives from 195 countries, and will form the basis for negotiations at the UN’s Climate Change Conference, known as COP26, taking place in Glasgow in November. The biggest single takeaway is the significant climate change that’s occurring in our lifetime, and urgent steps need to be taken to limit the effects.
What are some of the key findings of the report?
- In 2019, carbon dioxide (CO2) concentration reached its highest level in two million years.
- Global temperatures were hotter in the last decade than in any period in 125,000 years.
- Seas are rising at the fastest level in 3,000 years.
- The Arctic ice level is shrinking, and is now at its lowest in 1,000 years.
IPCC scientists believe it is now “indisputable” that human activities are causing the climate to change dramatically, and that people are responsible for the world warming up by 1 degree Celsius (C). Scientists also believe almost all emissions of greenhouse gases comes specifically from the extraction, transport and use of fossil fuels, as well as from agriculture and farming.
What does this mean for our planet?
The temperature changes outlined in the report confirm that weather extremes such as heatwaves, droughts, heavy rainfall, and tropical cyclones, have become much more prominent since the 1950s. These extremes are expected to become more frequent and more intense across different land regions. The report itself was published in the middle of a summer period in 2021 that had seen widespread flooding in China, Germany and Belgium, a heatwave across the US and Canada, and fires sparked by record temperatures in Turkey, Greece and Italy. In August, Spain recorded its hottest ever temperature, with the Andalusia region reaching 47.2C (116.96 Fahrenheit), while Sicily in Italy reported temperatures reaching 48.8C (119.84F).
The report suggests weather-induced disasters are likely to become more severe, as each fraction of temperature warming brings greater rainfall and rising sea levels, as well as intensifying droughts and wildfires.
Why has the climate worsened so quickly?
The IPCC report concluded that methane levels found in the air are now greater than at any point in the last 800,000 years. Methane, a gas that is mostly released from farming and oil and gas operations, has a warming impact measured at more than 84 times that of CO2 over a 20-year period, and is responsible for a quarter of global warming. So, as well as resolving to drastically reduce CO2 emissions over the next two decades, the IPCC report also recommended “Strong, rapid and sustained reductions” of methane emissions must be achieved.
What needs to be done?
As part of the report, the IPCC’s scientists ran through a number of different scenarios based on possible actions taken to reduce the level of greenhouse gas emissions. These present “five possible futures” that need to be considered. Each scenario has been calculated based on how quickly humans can reduce or eliminate greenhouse gas emissions, but also include analysis based on changes to populations, urban density, education, land use and wealth.
Scenario 1: very low emissions
The most optimistic outcome is based on a world where global CO2 emissions are indeed cut to ‘net-zero’ by 2050. Put simply, net-zero means the world is not adding new emissions to the atmosphere, and existing emissions are balanced by absorbing the same amount from the atmosphere. To reach this goal by 2050, societies will have switched to more sustainable practices, shifting away from a focus on economic growth and toward overall wellbeing. Under this scenario, global temperatures will rise by no more than 1.5C, before stabilising at around 1.4C by the end of this century. While extreme weather events will still be more common, the world will have dodged the worst effects of global climate change.
Scenario 2: low-level emissions
In the next-best scenario, global CO2 emissions are cut severely, although net zero is reached after 2050. This scenario would involve the same societal shift toward more sustainable practices, but global temperatures are predicted to stabilise at around 1.8C higher by the end of the century.
Scenario 3: mid-level emissions
This “middle ground” scenario predicts CO2 emissions remain at current levels until 2050, and start falling towards 2100, without ever reaching the net zero target. Progress toward sustainability is slow, with social development and income growing unevenly. In this scenario, temperatures will rise 2.7C by the end of the century.
Scenario 4: high emissions
In this scenario, CO2 emissions will have roughly doubled from current levels. Countries become more competitive with one another, shifting toward national security and ensuring food and water supplies only for their own people. By the end of the century, average temperatures will have risen by 3.6C.
Scenario 5: very high emissions
The fifth scenario is the future to avoid at all costs. Without any action to prevent rising temperatures, and economic growth still driven by the continued use of fossil fuels and by energy-intensive lifestyles, current CO2 emissions could double by 2050. Under this scenario, global temperatures could increase by 3C by 2060 and 5.7C by 2100, threatening the existence of human civilisation.
What can we learn from these scenarios?
While the IPCC cannot tell us which of the five scenarios is most likely, they do demonstrate how choices made now will have an impact on the future. Scientists have pointed out that cutting greenhouse gas emissions to net zero is just the first step to stabilising the earth’s long-term temperature.
The report also raises the stakes significantly ahead of the COP26 meeting in November. Global leaders, including the conference host Boris Johnson, will have to spell out a workable route to achieving net zero carbon emissions by 2050, to ensure the best-case scenario is possible, while resisting political pressure from climate change sceptics or those wanting to resist the economic costs of decarbonisation. Top of the agenda will be how policymakers can adapt and prepare for a world that will be 1.5C warmer, by helping countries and communities become more resilient to extreme weather events such as fires, floods and storms, while also working to dramatically reduced carbon and methane emissions.
What do companies need to consider?
The corporate world also has lots to think about following the publication of the IPCC report. Without a reduction in carbon emissions, rising temperatures will also bring natural disasters as well as financial shocks and supply chain disruptions. Therefore, the IPCC report, and any new agreements that are announced at COP26, are likely to encourage more companies to increase own efforts to become carbon neutral and launch their own green initiatives.
Crucially, climate action doesn’t have to wreck the global economy. A recent study by the European Institute on Economics and the Environment suggests that shifting to a ‘green’ economy and replacing oil and coal energy could add 8 million renewable energy sector jobs by 2050. As the IPCC recognises, the single most important change we can make is to wean ourselves off fossil fuels, using clean technology to reduce greenhouse gas emissions by as much as possible. Renewable energy and clean technology are therefore likely to be a high-growth sector and area of innovation in the years ahead.
No more time to waste
It’s easy to read the findings in the IPCC’s report and take the view that time is running out, and that the world lacks the collective will to transition away from fossil fuels in time to avert the worst-case scenario. But the report itself presents a clear case for seizing the initiative and collectively taking the steps necessary to prevent climate disaster. Up till now, climate change, and the human involvement in rising global temperatures was a debate. But that debate is now over. With COP26 fast approaching, the time has come for leaders to take definite steps to decarbonise the world.
What can pension schemes do?
I believe that UK pension schemes are in a unique position to drive change, whilst also focussing on the risks of climate change to their investments. The UK pensions market is the third largest in the world, overseeing over £2.5 trillion of assets. This is a tremendous responsibility and collectively gives pension schemes the power to make a real difference in driving the climate agenda with their asset managers.
Managing the risks of climate change will be a critical factor for UK pension schemes, especially to protect member pensions pots. They will need access to good quality data on the environmental impact on their investments, including scope 1, scope 2 and scope 3 carbon emissions for both pooled funds and segregated mandates. Once schemes can measure their carbon footprint, and understand other environmental factors, they can then address their exposure to the risks of climate change.