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Schroder
Climate Change Report: Summarising the
Intergovernmental Panel on Climate Change’s
trilogy and its implications for investors
Schroder Climate Change Report
Contents
01
02
07
09
13
Executive Summary
Introduction
The Physical Science basis
Atmosphere
Ocean
Cyrosphere
Sea Level
Drivers of climate change
Climate stabilization
Impacts, Adaptation and vulnerability
Managing future risks and building resilience
The Mitigation of Climate change
Mitigation options
Energy Supply
Energy, end-use sectors
What does climate change mean from an investment perspective?
Schroder Climate Change Report
executive summary
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This report summarises the conclusions of the world’s leading climate change scientists,
and the consensus approval of 120 participating governments as documented in the
Intergovernmental Panel on Climate Change’s 5th Assessment report
Warming in the climate system is indisputable and the observed changes since the
1950’s are unprecedented
Continued elevation of greenhouse gas (GHG) concentrations in the atmosphere will
cause further warming and changes to the climate system
Global land and ocean surface temperatures have shown an average warming of 0.85oC
since 1880. Mean surface temperature increases are expected to exceed 1.5oC by the
end of the century under all scenarios, and are expected to exceed 3oC increase under
national current mitigation pledges.
Warming has been driven by the accumulation of GHG in the atmosphere. Carbon
dioxide concentrations have increased by 40%, Methane by 150% ad nitrous oxide by
20% when compared with pre-industrial levels. GHG atmospheric concentrations now
exceed the highest concentrations found in ice cores dating back 800,000 years.
At current rates of emission the recommended limit for keeping global warming to
within 2oC by the end of the century (a level regarded as dangerous by climate change
scientists) would be exceeded within the next two decades
Impacts of climate change are already being observed and the risks of the severity of
these impacts increases with rising temperatures. Impacts range from increased water
scarcity and flooding, biodiversity loss, food production system disruption and an
amplification of the risks of human conflict.
The number, and quality, of economic studies on the impacts of climate change is
limited, putting economic losses associated with a 2oC temperature increase at between
0.2 and 2% of global income. There are few quantitative estimates for the economic
impacts of 3oC warming or above.
Despite political acceptance and commitment to limit global warming to within 2oC
annual emissions of GHG have been increasing
Limiting global warming to 2oC would require substantial cuts in anthropogenic GHG
emissions (40 to 70% reductions from 2010 levels). Implying significant impacts to
electricity generation, fossil fuel extraction and transport
Investors should assess both how policy commitments to limit warming to 2oC may
impact investment decisions and strategies as well as assessing the exposure of
corporate value chains to the impacts of climate change at different degrees of warming,
and the global, and national, economic impacts of different degrees of warming.
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Schroder Climate Change Report
introduction
This report summarises the findings of the fifth assessment report (AR5s) published by the
Intergovernmental Panel on Climate Change (IPCC). The first of these series of ARs was
produced in 1990 with regular updates being published every five years which summarise
the findings of published research about climate change. These findings are grouped into
three reports looking at “the physical science of climate change”, “impacts, adaptation and
vulnerability” and “the mitigation of climate change”. The final reports are intensively reviewed
by government delegates (this can involve representatives of over 120 governments)
ensuring that the final published version not only has the agreement of the world’s leading
climate scientists but also the consensus approval of participating governments.
We provide a short review of the AR’s “Summary for Policymakers” before exploring
(at a high level) the relevance for asset owners and managers.
The Physical Science basis
The first output in AR5 looks at the observed changes in the various systems (e.g.
atmosphere, ocean, cryosphere) due to climate change and the impact of further climate
changes to these systems. It has used a variety of methods from paleoclimatic records
(dating back hundreds of millions of years), instrumental records (dating back to the mid19th century) and a more comprehensive (and diverse) set of climatic data since the 1950s.
This information is used to produce a broad overview of the long-term changes in our
climatic system. This research shows that warming in the climate system is indisputable
and the observed changes since the 1950s are unprecedented.
In addition to the observed changes due to climate change the IPCC reports also explore
the extent of future climate change under various scenarios based on the efficacy of
humanity’s efforts to reduce its greenhouse gas (GHG) emissions. The climate models
employed to make these predictions are constantly improving but have already proven
their efficacy by modelling the observed continental-scale surface temperature patterns
and trends over past decades.
The IPCC uses four different emissions pathways (or Recommended Concentration
Pathways – RCP1s) for its scenarios, but in all scenarios the atmospheric concentration of
carbon dioxide (CO2) in 2100 is higher relative to present day, and this continued elevation
of GHG concentrations will cause further warming and changes to the climate system.
1 The RCPs used are RCP2.6, RCP4.5, RCP6.0 and RCP8.5; where the numerical figure refers to the extent of change in
the Earth’s energy budget (or Radiative Forcing – RF) caused by natural and anthropogenic sources. For example RCP2.6
is the most optimistic scenario and refers to an increase in RF of 2.6 Watts/meter2 (Wm-2).
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Schroder Climate Change Report
Atmosphere
In 2012, global land and ocean surface temperatures have shown an average warming of
0.85oC since 1880 and between 1901 and 2013 almost the entire globe has experienced
surface warming (as shown in Figure 1).
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1.0
1.25
1.5
1.75
2.5
(ºC)
Figure 1: Observed changes in surface temperature 1901-2012 (Source: IPCC, 2013: Summary for Policymakers. In:
Climate Change 2013: The Physical Science Basis)
Over the next 20 years (2016-2035) the IPCC estimates that global mean surface
temperatures will continue to increase in the range of 0.3oC to 0.7oC and by the end
of this century this could be in the range of 0.3oC to 4.8oC. Under all RCP scenarios
(except RCP2.6) the mean global surface temperature change by the end of the century
is projected to exceed 1.5oC (see figure 2). It is virtually certain that this will result in more
frequent hot temperatures and fewer cold temperatures over most land areas on both
daily and seasonal timescales and that this warming will impact on the global water cycle
(though the impacts will not be uniform).
Mean over
2081-2100
6.0
42
0.0
RCP2.6
32
-2.0
1950
2000
2050
2100
Figure 2: Global average surface temperature change under different RCPs (Source: IPCC, 2013: Summary for
Policymakers. In: Climate Change 2013: The Physical Science Basis)
RCP6.0
2.0
RCP8.5
39
RCP4.5
(ºC)
4.0
Historical
RCP2.6
RCP8.5
Schroder Climate Change Report
Ocean
The Earth’s oceans cover 70% of the surface of the Earth and around 90% of the Earth’s
volume and changes in the energy balance in the oceans will affect weather patterns
around the world. Between 1971 and 2010 the Earth’s oceans accounted for around
90% of the warming in the Earth’s energy budget, with 60% of this occurring in the upper
surface (0-700m) and 30% in the deeper ocean (below 700m). It is expected that the
oceans will continue to warm during the rest of the century with greater heat penetration
into the deep ocean affecting ocean circulation.
Cyrosphere
The cryopshere refers to those parts of the world where water is in its solid form, covering
the ice caps of the north and south poles, the glaciers of mountain regions, snow cover
and permafrost. The observations show that the cryopshere continues to shrink. The
average rate of ice loss from the Greenland and Antarctic ice sheets has substantially
increased during 2002-2011. In the Arctic the sea ice extent has decreased over the
period of 1979–2012 at a rate of 3.5 to 4.1% per decade (summer sea ice decline is at
a rate of 9.4 to 13.6% per decade – as shown in Figure 3). In the northern hemisphere,
snow cover has decreased since the middle of the 20th century, whilst permafrost
temperatures in most regions have increased since the early 1980s with observed
warming of 3oC in Northern Alaska and 2oC in parts of the Russian European North.
14
12
10
(million km2)
3
8
6
4
1900
1920
1940
1960
1980
2000
Year
Figure 3: Arctic summer sea ice extent (Source: IPCC, 2013: Summary for Policymakers. In: Climate Change 2013:
The Physical Science Basis). All time-series (coloured lines indictating different data sets) show annual values, and
where assessed, uncertainties are indictated by colour shading.
Sea Level
The melt water from land based ice masses coupled with the thermal expansion caused
by warming oceans explain about 75% of the observed global mean sea level rise (Figure
4), and it is expected that over the period of 2018-2100 sea level will rise by a further
0.26 to 0.82m.
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Schroder Climate Change Report
200
150
(mm)
100
50
0
-50
1900
1920
1940
1960
1980
2000
Year
Figure 4: Global average sea level rise (Source: IPCC, 2013: Summary for Policymakers. In: Climate Change 2013:
The Physical Science Basis). All time-series (coloured lines indictating different data sets) show annual values, and
where assessed, uncertainties are indictated by colour shading.
Drivers of climate change
Figure 5 demonstrates the contributions that different greenhouse gases and aerosols
have made to global warming. The atmospheric concentrations of CO2, methane (CH4)
and Nitrous oxides (N2O) have all increased as a result of human activity since preindustrial levels; CO2 by 40%, methane by 150% and nitrous oxide by 20%. Indeed the
concentrations of these gases in the atmosphere now exceed the highest concentrations
found in ice cores dating back 800,000 years. At a cumulative level anthropogenic CO2
emissions between 1750 and 2011 were 555GtC of which around 43% has accumulated
in the atmosphere, 28% in the oceans and 29% in natural terrestrial ecosystems. The
increase in atmospheric concentrations of GHG has contributed to a global mean surface
warming of between 0.5oC and 1.3oC between 1951 and 2010, which has been off-set
in part by the cooling effect of aerosols and natural forcings, meaning that the observed
warming for this period was approximately 0.6oC to 0.7oC. Over every continent (except
Antarctica) anthropogenic forcings have made a substantial contribution to surface
temperature increases since the mid-20th century.
Anthropogenic
Natural
Short lived gases and aerosols
Well-mixed
greenhouse gases
Emitted
compound
Resulting atmospheric
drivers
Level of
confidence
Radiative forcing by emissions and drivers
CO2
CO2
1.68 [1.33 to 2.03]
VH
CH4
CO2 H2Ostr O3 CH4
0.97 [0.74 to 1.20]
H
O3 CFCs HCFCs
0.18 [0.01 to 0.35]
H
N2O
N2O
0.17 [0.13 to 0.21]
VH
CO
CO2 CH4 O3
0.23 [0.16 to 0.30]
M
NMVOC
CO2 CH4 O3
0.10 [0.05 to 0.15]
M
-0.15 [-0.34 to 0.03]
M
-0.27 [-0.77 to 0.23]
H
-0.55 [-1.33 to -0.06]
L
-0.15 [-0.25 to -0.05]
M
0.05 [0.00 to 0.10]
M
Halocarbons
NOx
Nitrate CH4 O3
Aerosols and
Mineral dust Sulphate Nitrate
precursors
(Mineral dust, Organic carbon Black carbon
SO2, NH3,
Organic carbon Cloud adjustments
and Black carbon) due to aerosols
Albedo change due
to land use
Changes in solar
irradiance
2011
Total anthropogenic
RF relative to 1750
-1
2.29 [1.13 to 3.33]
H
1980
1.25 [0.64 to 1.86]
H
1950
0.57 [0.29 to 0.85]
M
0
1
2
Radiative forcing relative to 1750 (W m-2)
3
Figure 5: Radiative forcing estimates of greenhouse gases in 2011 relative to 1750 (Source: IPCC, 2013: Summary for
Policymakers. In: Climate Change 2013: The Physical Science Basis)
Schroder Climate Change Report
Not only do these gases contribute to global warming, but they also affect other
biogeochemical systems; the absorption of anthropogenic CO2 by the oceans has
gradually altered the pH balance of the oceans so that they are becoming more acidic (see
figure 6) which impacts the organisms living in the oceans and the ecosystems in which
they live. The IPCC also states that ocean uptake of anthropogenic CO2 will continue
through to 2100 under all of its scenarios.
400
380
360
340
320
8.12
8.09
8.06
1950
1960
1970
1980
1990
2000
in situ pH unit
pCO2 (µatm)
5
2010
Year
Figure 6: Surface ocean CO2 concentrations and pH balance of the ocean. Partial pressure of dissolved CO2 at the ocean
surface (blue curves) and in situ pH (green curves), a measure of the acidity of ocean water. Measurements from three
stations in the Atlantic. Full details of the data sets shown here are provided in the underlying report. (Source: IPCC,
2013: Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis). Please note, this graph is
a copy of that presented in the IPCC ARI report and there was no data prior to 1985.
Climate stabilization
The IPCC report highlights that there is an approximately linear relationship between global
mean surface temperatures and cumulative emissions (see Figure 7). Given this linear
relationship it is possible to determine the carbon budget that exists in order to remain
within the 2oC warming target that the Earth’s governments have signed up to and that
scientific recommendation says is dangerous to exceed. Given the complexity of the
climate system the IPCC puts forwards three budgets which would offer different levels of
probability for keeping within 2oC of warming. For a >33% chance cumulative emissions
since 1861-1880 would need to stay between 0 and 1750GtC, for a >50% chance the
figure is between 0 and 1210GtC and for a >66% chance the figure is between 0 and
1000GtC. If these figures account for non-CO2 forcings than the carbon budgets are
reduced to 900 GtC, 820 GtC and 790GtC respectively. By 2011 humanity had already
emitted 515 GtC (since 1861-1880), implying that, for the emissions budget giving a
50% chance of exceeding 2oC, only 305GtC of the budget remain, a limit that would be
exceeded in the next two decades at current rates of emission.
The IPCC report states that (depending on the mitigation scenario adopted) between
15 and 40% of emitted CO2 will remain in the atmosphere for 1,000 years. Surface
temperatures will therefore remain elevated even with the cessation of net anthropogenic
CO2 emissions and, due to the length of time it takes to transfer heat from the ocean
depths to the surface, ocean warming will continue for centuries. A degree of climate
change is therefore locked in to our future, it is the severity of this and its impacts on
different systems that we still have the ability to control.
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Schroder Climate Change Report
Cumulative total anthropogenic CO2 emissions from 1870 (GtCO2)
0
Temperature anomaly relative to 1861-1880 (ºC)
5
500
500
1000
1500
2000
2500
2500
4
3
2
1
RCP2.6
RCP4.5
RCP6.0
RCP8.5
0
0
500
1000
1500
Historical
RCP range
1% yr -1 CO2
1% yr -1 CO2 range
2000
2500
Cumulative total anthropogenic CO2 emissions from 1870 (GtC)
Figure 7: Global mean surface temperatures increase as a function of cumulative total global CO2 emissions from various
lines of evidence. (Source: IPCC, 2013: Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis).
Multi-model results from a hierarchy of climate-carbon cycle models for each RCP until 2100 are shown with coloured
lines and decadal means (dots). Some decadal means are labeled for clarity (e.g. 2050 indictating the decade 2040-2049).
Model results over the historical period are indicated in black. The coloured plume illustrates the multi-model spread over
the four RCP scenarios and fades with the decreasing number of available modelsin RCP8.5. The multi-model mean and
range simulated by CMIP5 models, forced by CO2 increase of over 1% per year (1%yr-1 CO2 simulations exhibit lower
warming than those driven by RCPs, which include additional non CO2 forcings. Temperature values are given relative to
the 1861-1880 base period, emissions relative to1870. Decadal averages are connected by straight lines.
Schroder Climate Change Report
Impacts, adaptation and
vulnerability
5
4
4
3
3
(°C relative to 1850-1900) as an
approximation of preindustrial levels)
5
Global mean temperature change
(°C relative to 1986-2005)
Predicting the impacts of climate change is a much more challenging exercise than
quantifying the observed changes in the climate system. This is partly due to the
complexity of the global system as well as being dependant on the extent and speed at
which humanity manages to reduce GHG emissions. This means that putting figures on
the extent and rate of climate change and its impacts, is a difficult exercise. The IPCC
resolves this in its second report “Impacts, adaptation and vulnerability” by focusing on the
degree of risk from issues such as extreme weather, singular events (e.g. tipping points)
and the distribution of events around the world, with the conclusion that each degree of
warming will escalate the risk (Figure 8).
Global mean temperature change
7
2
2
1
1
0
-0.61
°C
0
Unique &
threatened
systems
Extreme
weather
events
Distribution
of impacts
Global
aggregate
impacts
Large-scale
singular
events
°C
Level of additional risk due to climate change
Undetectable
Moderate
High
Very high
Figure 8: Increasing risks associated with rising temperatures (Source: IPCC, 2013: Summary for Policymakers. In: Climate
Change 2013: Impacts, adaptation and vulnerability)
The impacts of climate change are already being observed. Figure 9 summarises
these impacts across physical, biological and human systems and IPCC’s view on the
contribution of climate change to these risks.
Schroder Climate Change Report
Figure 9: Global patterns of impacts in recent decades attributed to climate change (Source: IPCC, 2013: Summary for
Policymakers. In: Climate Change 2013: Impacts, adaptation and vulnerability)
The IPCC report then focuses on the potential impacts of climate change across natural
systems (and the species within them) and the ramifications for humanity. These can be
summarised as:
–– Fresh water resources – the proportion of the world’s population exposed to water
scarcity and flooding will increase. Renewable surface water and ground water reserves
will be significantly reduced in most dry sub-tropical regions. In addition water quality will
be impacted by the effects of higher temperatures, increased pollutant loads from heavy
rainfall events and the increased concentration of pollutants during droughts. Water
treatment facilities will be disrupted during flood events2.
–– Terrestrial and freshwater species and ecosystems – a large proportion of fresh water
and terrestrial species will face increasing risks of extinction and abundance decline
due to the impacts of climate change on habitats. This will affect the functioning and
resilience of ecosystems and the services they provide3.
–– Coastal systems and low lying areas – continued sea level rise will cause coastal
submergence, flooding and coastal erosions.
–– Marine systems – the impacts of acidification of the oceans and rising temperatures will
change the distribution of marine biodiversity challenging the productivity of fisheries and
the value of other ecosystem services (e.g. tourism).
–– Food security and food production systems – all aspects of food security (e.g. food
access, utilisation and price stability) will be affected by climate change. For major crops
in tropical and temperate regions, climate change is projected to have a negative impact
for local temperature increases above 2oC, though some individual locations may benefit.
2. Schroders’ 2007 report “Water, Cheap and abundant but not for long” explores the cross-sectoral risks associated with
water scarcity.
3. Schroders’ 2011 report “Ecosystem services, where’s the discussion” introduces the relevance of ecosystem service
function to economic progress.
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Schroder Climate Change Report
–– Human security – climate change may amplify existing drivers of conflict (such as poverty,
economic shocks and natural resource demand) and, as such, is projected to increase
the displacement of people. Climate change is also expected to increase national security
policies through its impact on critical infrastructure and territorial integrity.
–– Key economic sectors and services – The IPCC report specifically notes that other
factors such as population change, age structure, lifestyle, technology, regulation and
governance are likely to have a much larger impact on economic sectors than that
caused by climate change. There is a large degree of variance in the methodologies used
in the assessments of the economic impacts of climate change (the variance could be
in the coverage of subsets of economic sectors, the dependence on a large number of
assumptions [many of which are disputable] and the failure to account for catastrophic
changes and tipping points). Recognising these limitations in the, and the limited amount
of, models, global economic losses due to an additional temperature increase of 2oC are
in the range of 0.2% to 2.0% of global income, though the IPCC notes that losses are
more likely than not to be greater than this range and will accelerate with greater warming.
There are few quantitative estimates for the economic impacts of 3oC warming or above.
Managing future risks and building resilience
The scope and severity of changes to natural and human systems will necessitate
expenditure on mechanisms to adapt to these changes. Governments at various levels are
starting to develop adaptation plans and policies to integrate climate-change considerations
into broader development plans. However there is evidence that there is a significant
gap between the funds needed and the funds being made available for adaptation, and
addressing this gap is a recurring theme at international climate change negotiations.
The ability of governments and the world to implement climate resilient pathways are
dependant on what is accomplished through climate-change mitigation, the more effective
mitigation efforts are, the less the costs of adaptation (and visa versa), however there is a
warning in the IPCC reports that adaptation limits may be exceeded with greater degrees of
climate change.
the mitigation of climate change
Mitigation options
The first two summary reports in the AR5 have shown that there are already considerable
changes occurring to the Earth’s ecosystems and services as a result of climate change.
The elevated CO2 levels are causing both atmospheric and oceanic warming (as well as
ocean acidification) which is resulting in changes to the cryosphere, sea level rise and
weather patterns. These changes are already having an impact, and will continue to, on
the multitude of systems on which the global economy depends, from the provision of
freshwater, increasing species extinction and abundance decline, costal flooding, changes
to marine ecosystems, food production impacts and impacts on human security. The risks
of severe changes to these systems will increase with further warming which is directly
linked to the continual accumulation of greenhouse gases in the atmosphere. There is the
capacity to adapt to some of these changes, but the costs of adaptation will increase (and
may be exceeded) with increased levels of warming. Climate scientists have said that it
would be dangerous to exceed a level of warming that is 2oC above pre-industrial levels,
and have been able to calculate the amount of carbon that would need to be emitted in
to the atmosphere that would give different probabilities of exceeding this limit, and hence
been able to propose different carbon budgets for different warming scenarios. The World’s
governments have recognised the scientific advice to keep warming to within 2oC, most
recently, when they signed the Copenhagen Accord in 2009, and that this will require deep
cuts to current emissions rates.
The third and final summary report outlines the mitigation options that will be needed to limit
warming to within 2oC as well as reviewing current progress in limiting global emissions.
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Schroder Climate Change Report
Despite the early warnings and growing number of national and regional mitigation pledges,
annual GHG emissions have increased by 1GT CO2e per annum between 2000 and 2010
compared with a rate of growth of 0.4GT CO2e from 1970 to 2000, as shown in Figure 10.
Half of the cumulative anthropogenic emissions have occurred in the last 40 years.
+2.2%/yr
2000-2010
49 Gt
GHG Emissions (GtCO2eq/yr)
50
40
30
38 Gt 0.81%
27 Gt 0.44%
33 Gt 0.67%
7.4%
7.9%
18%
19%
40 Gt 1.3%
11%
13%
16%
15%
62%
Gas
17%
10
F-Gases
N2O
CH4
CO2 FOLU
CO2 Fossil Fuel and
Industrial Processes
59%
58%
55%
0
1970
16%
6.9%
16%
18%
7.9%
20
2.0%
6.2%
+1.3%/yr
1970-2000
1975
1980
1985
1990
1995
2000
2005
65%
2010
2010
Figure 10: Total annual anthropogenic GHG emissions by group of gases from 1970-2010 (Source: IPCC, 2013: Summary
for Policymakers. In: Climate Change 2013: The mitigation of climate change)
Without additional efforts to reduce GHG emissions beyond those in place today,
population and economic growth will mean that, on a business as usual path, the
accumulation of GHGs in the atmosphere are commensurate with a global mean surface
temperature increase by 2100 of 3.7 to 4.8oC.
140
120
100
80
>1000
ppm CO2eq
720-1000 ppm CO2eq
580-720 ppm CO2eq
530-580 ppm CO2eq
480-530 ppm CO2eq
430-480 ppm CO2eq
Full ARS Database Range
– 90th percentile
– Median
– 10th percentile
Baseline (Full range in 2100)
Annual GHG Emissions (GtCO2 eq/yr)
The IPCC therefore considered over 900 mitigation scenarios with ranges spanning
atmospheric concentrations of CO2eq in the range of 430ppm to 720ppm by 2100. Those
mitigation pathways that are more likely than not to limit warming to within 2oC (compared
to pre-industrial levels) are characterised by atmospheric concentrations in 2100 of about
450ppm. Figure 11 provides a representation of the different scenarios (including the
Relative Concentration Pathways [RCP2.6 is the pathway that is more likely than not to
keep warming within 2oC]), in the diagram the grey bar on the right represents the baseline
scenario based on current mitigation pledges.
60
40
20
0
-20
2000
2020
2040
2060
2080
2100
Figure 11: GHG emission pathways 2000-2100. All scenarios (Source: IPCC, 2013: Summary for Policymakers. In: Climate
Change 2013: The mitigation of climate change)
Achieving this 450ppm target will require substantial cuts in anthropogenic GHG emissions
by mid-century (40 to 70% less than 2010 levels). Scenarios reaching 450ppm in 2100
typically involve temporary overshoot (as do many 500ppm to 550ppm scenarios) and
will typically rely on the availability and widespread deployment of carbon capture and
11
Schroder Climate Change Report
sequestration (CCS) technology.
Current national mitigation pledges are in-line with a cost-effective scenario that is likely
to keep temperature change below 3oC. Delaying mitigation efforts beyond those in place
today is estimated to substantially increase the difficulty of transitioning to low long-term
emission levels and will reduce the range of options available for maintaining temperature
change below 2oC. There are additional benefits to achieving the low emission scenarios in
the form of air quality and energy security benefits, with associated benefits to human and
ecosystem health and resilience within energy systems.
78% of CO2 emissions from 1970 to 2010 were from the combustion of fossil fuel and
industrial processes (as shown in Figure 10) and so efforts to mitigate emissions to the
level advised by science and supported by government will require substantial changes
to existing energy systems and infrastructure. With the result that mitigation policy could
potentially devalue fossil fuel assets and reduce revenues for fossil fuel exporters, as well
as raising questions about the investment in long-lived infrastructure projects that could
lock societies into GHG-intensive emission pathways which may be very difficult or costly
to change.
Figure 12 provides a sectoral breakdown (by their contribution) to current GHG emissions,
providing an indication of where most emissions reductions could be achieved.
Energy supply
In the baseline scenarios depicted in Figure 11 CO2 emissions from the energy supply
sector are projected to double or triple by 2050 compared to the 14.4GtCO2/year that
the sector emitted in 2010. Decarbonising electricity generation is a key component of
cost- effective mitigation strategies and in most scenarios this happens more rapidly in the
electricity generation sector than in the industry, buildings and transport sectors. There are
nascent signs of this occurring with renewable energy accounting for over 50% of new
electricity-generating capacity in 2012. CCS and Bioenergy with CCS (BECCS) play an
important role in many low-stabilisation scenarios.
Electricity and Heat
Production
25%
Industry
1.4%
AFOLU
24%
Industry
11%
Buildings
6.4%
Transport
14%
49 Gt CO2eq
(2010)
Industry
21%
Transport
0.3%
Buildings
12%
Other Energy
9.6%
AFOLU
0.87%
Direct Emissions
Indirect CO2 Emissions
Figure 12: 2010 Greenhouse gas emissions by economic sector (when indirect emissions from final energy use are accounted
for than industry and the built environment increase to 31% and 19% respectively) AFOLU: Agriculture, Forestry and Other
12
Schroder Climate Change Report
XXXX
Land Use. (Source: IPCC, 2013: Summary for Policymakers. In: Climate Change 2013: The mitigation of climate change)
Energy end-use sectors
Transport. The transport sector accounted for 27% of final energy use and 6.7 GtCO2
(direct emissions) in 2010; and emissions from the sector are projected to double by 2050.
This growth from increasing numbers of global passenger and freight transport could offset
the potential 15-40% reductions in emissions from transport that could be achieved by
2050. Energy efficiency and vehicle improvements could deliver between 30-50% reductions
in 2030 compared to 2010 whilst changes to urban transport systems, alternatives to short
haul flights and investment in new transport infrastructure could deliver 20-50% emission
reductions by 2050.
Buildings. In 2010 buildings accounted for 32% of final energy use. By 2050 energy
demand from this sector is expected to double causing a 50-150% increase in the sector’s
CO2 emissions by mid-century in baseline scenarios. The mitigation options have significant
co-benefits, such as improvements in energy security, human health, productivity and fuel
poverty reductions.
Industry. In 2010 the industry sector accounted for 28% of final energy use, under the
baseline scenarios and without significant improvements in energy efficiency these emissions
are projected to grow by 50-150% by 2050. Emissions could be reduced by 25% through
wide-scale upgrading, replacement and deployment of best available technologies.
Human settlements, infrastructure and spatial planning. A large proportion of the
world’s urban areas will be developed over the next two decades which presents a window
of opportunity for implementing urban design and infrastructure that is not locked in to high
carbon models.
As has already been mentioned, to achieve these changes will require significant shifts in
investment patterns, investment in fossil fuel will have to decline whilst those in renewables
and energy efficiency will increase (as shown in Figure 13).
800
Changes in Annual Investment Flows
2010-2029 (Billion USD2010/yr)
700
600
500
400
300
200
100
0
-100
-200
-300
-400
# of studies
Total Electricity
Generation
4
4
5
Renewables
4
4
5
Nuclear
4
4
Power Plants
with CCS
5
4
4
5
Fossil Fuel Power
Plants without
CCS
4
4
5
Extraction of
Fossil Fuels
4
4
5
Energy Efficiency
Across Sectors
3
3
4
Figure 13: Change in annual investment flows from the average baseline level over the next two decades (2010-2029) in
order to stabilize GHG concentrations in the 430-530ppm CO2e by 2100 (Source: IPCC, 2013: Summary for Policymakers.
In: Climate Change 2013: The mitigation of climate change)
Currently it is estimated that there is USD345-385bn per annum invested into mitigation
solutions (of which public finance is USD35-49bn); and, in 2012, around 67% of global
GHG emissions were covered by some form of national legislation or strategy to mitigate
emissions (compared with 45% in 2007), though this has had no substantial impact on
emissions trends. The IPCC states that if subsidies for fossil fuels are removed then this
will help to reduce aggregate GHG emissions by mid-century, and that with regards to
other policies, those that help to raise government revenues (e.g. fuel taxes) generally have
13
Schroder Climate Change Report
lower social costs than approaches that don’t (e.g. subsidies).
What does climate change mean
from an investment perspective?
The IPCC reports makes clear that there are significant risks to the global ecosystem
(and hence the global economy) if climate change exceeds a 2oC increase in average
surface temperature over pre-industrial levels by the end of the century and it makes
clear that changes caused by climate change are already occurring. It also highlights that
despite two thirds of the world’s GHG emissions being covered by some form of national
legislation, the rate of global emissions has increased over the last decade and the current
emissions pathway puts us on a trajectory that is likely to cause at least 3oC increase by
the end of the century. The emissions pathway that is estimated to keep us within 2oC
warming would require global GHG emissions to be 40 to 70% less than 2010 levels by
2050, and that the window of opportunity for establishing a cost effective mechanism to
achieving this target is closing.
This means that there are essentially two ways to think about climate
change from the investment perspective:
1. Will there be sufficient policy responses to put humanity on a path that avoids a
dangerous level of warming (i.e. within 2oC and above) and what will this mean to the
value chains of the companies we invest in and to national and global economies?
2. If the global policy response isn’t sufficient to avoid dangerous global warming then
what exposure does a company have throughout its value chain to climate change
impacts and tipping points and how will these impacts affect national and global
economies and human society as a whole? Under such a scenario can investors deliver
long-term investment objectives?
Ideally global political and business leaders will commit to sufficiently robust policies (and
all eyes are on the outcomes of the 2015 international negotiations on climate change in
Paris for such a signal) to avoid the second option having to be a consideration; however,
given the pace and scale of commitments made so far it would be prudent to (just as the
IPCC did in analysing over 900 different scenarios to produce their four RCP scenarios)
consider the interplay of cause and effect between policy action and impacts on future
global warming and how this will impact the investment process. When considering these
questions one is also presented with the question about timescales (e.g. what are the
impacts of climate change on 30 year economic performance projections? Or, do the
products or services of companies invested in today have a positive or negative impact
on this?).
At present there are several strategies that investors could employ when
thinking about climate change. Below is a brief summary of some of these.
– Dedicated climate change investment products
such as renewable energy or climate change funds.
In 2007 Schroders launched its multi-award winning Global climate change fund
which invests exclusively in companies that will benefit from efforts to mitigate or adapt
to climate change.
– Engagement
ctive engagement with senior management on how they have assessed (if at all), and
A
disclosed, the risks of climate change to their business over different timeframes and the
strategies put in place to address these risks (e.g. setting absolute emission reduction
targets that are in line with scientific recommendations, or improving water use efficiency).
Schroders has been active in this area since 2000 when we first voted on a climate
change resolution, since then we have been regularly engaging with companies
on climate change issues. In 2003 we were a founder member of the Institutional
Schroder Climate Change Report
Investors Group on Climate Change, a collaborative initiative originally established to
raise awareness about the risks and opportunities that climate change presents to the
investment industry. We have been a signatory to the Carbon Disclosure Project (CDP)
since 2006, which works to motivate companies to disclose their impacts on the climate
(and the climate’s impact on them) and to take action to reduce these impacts. In 2011
we became members of CDP’s Carbon Action Initiative, which specifically engages
with high climate impact companies to encourage the public disclosure of climate
change targets.
– Integration
Consideration of a company’s exposure to physical and regulatory climate change risks
and opportunities through its value chain, and management’s strategy for mitigating or
optimising this, into stock valuation and selection. Similar considerations could also be
undertaken in the analysis of sovereign bonds.
In 2003 Schroders produced its first report looking at the risks of climate change
legislation to the aviation sector and since then we have regularly produced such
reports identifying sector or national risks and opportunities to climate change. Certain
sectors (e.g. Basic materials, energy, industrials, transport and utilities have a much
greater exposure to climate change risks (both policy and physical ones). In addition
company analysts at Schroders are increasingly required to demonstrate how they have
considered environmental, social and governance issues (including climate change)
within the stock valuation process.
– Portfolio carbon footprint analysis
Whilst there are a lot of caveats with this (e.g. it would capture the emissions in the
manufacture of a car, but not in its use) it can help to provide a focus for discussion as
to whether a portfolio is over or under exposed to climate change risks.
In 2013, Schroders mapped the carbon footprint of some of its portfolios and will
continue to assess the best way to use and report on this information.
– Divestment
Reducing exposure to fossil fuel assets within a portfolio. This could range from a zero tolerance approach to one which seeks to only have exposure to the most carbon efficient fossil fuel producers.
In 2013 Schroders produced a briefing document entitled “Unburnable Carbon: How
should investors respond?”
– Macro-economic impact analysis
There is a paucity of analysis (and hence advice) on the medium to long term financial
impacts of climate change (as highlighted in the IPCC report). The lack of this analysis
has implications for stock selection and valuation decisions as growth projections
which don’t integrate an assumption about climate change impacts are likely to be
erroneous, which may affect assumptions about the future performance of a company
or country. This analysis will also help in asset allocation decisions as it can help to
frame questions about the state of future economies and hence how individuals and
institutions will be using their investments in the future.
Carbon regulation is one of a host of ecosystem services (e.g. soil formation, nutrient
cycling, pollination) that humanity currently does not value and since 2009 Schroders
has been publishing on the investment implications of ecosystem service decline and on
the degree of its integration into economic forecasting.
– Policy involvement
Great clarity and certainty on national and global climate change policy will provide
investors with greater confidence when making long-term investment decisions.
Schroders has been a regular signatory to efforts to encourage this policy clarity
including the regular Prince of Wales Business Leaders Forum Communiqués on
Climate Change and the Investors Statement on Climate Change as well as meeting
with government bodies to discuss the issue.
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