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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 – – – – – – – – – – – 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. 1 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). 2 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. 4 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. 6 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. 8 9 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. 10 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. 14 S chroder climate change report Bibliography IPCC, 2013: Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. IPCC, 2014: Summary for Policymakers In: Climate Change 2014: Impacts, Adaptation and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Field, C.B., V.R. Barros, D.J. Dokken, K.J. Mach, M.D. Mastrandrea, T.E. Bilir, M. Chatterjee, K.L. Ebi, Y.O. Estrada, R.C. Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken, P.R. Mastrandrea, and L.L. White (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1-32. IPCC, 2014: Summary for Policymakers, In: Climate Change 2014, Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlomer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. Important information. The views and opinions contained herein are those of the Responsible Investment team, and may not necessarily represent views expressed or reflected in other communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. 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