IPCC_AR5__Implications_for_Investors__Briefing__WEB_EN

Climate Change:Implicationsfor Investorsand FinancialInstitutionsKey Findings from theIntergovernmental Panelon Climate ChangeFifth Assessment ReportFinance InitiativeChanging finance, financing change

ThePhysicalScienceofClimateChangeRising temperatures:The Intergovernmental Panel on Climate Change (IPCC)Fifth Assessment Report (AR5) concludes that climate changeis unequivocal, and that human activities, particularlyemissions of carbon dioxide, are very likely to be thedominant cause. Changes are observed in all geographicalregions: the atmosphere and oceans are warming, the extentand volume of snow and ice are diminishing, sea levels arerising and weather patterns are changing.Projections:Computer models of the climate used by the IPCCindicate that changes will continue under a range ofpossible greenhouse gas emission scenarios over the 21stcentury. If emissions continue to rise at the current rate,impacts by the end of this century are projected to includea global average temperature 2.6–4.8 degrees Celsius (°C)higher than at present, and sea levels 0.45–0.82 metreshigher than at present.To prevent the most severe impacts of climate change,parties to the UN Framework Convention on Climate Change(UNFCCC) agreed a target of keeping the rise in average globaltemperature since pre-industrial times below 2°C, and toconsider lowering the target to 1.5°C in the near future.The first instalment of AR5 in 2013 (Working Group I onthe physical science basis of climate change) concludedthat by 2011, we had already emitted about two-thirdsof the maximum cumulative amount of carbon dioxidethat we can emit if we are to have a better than two-thirdschance of meeting the 2°C target.Impact of past emissions:Even if emissions are stopped immediately, temperatureswill remain elevated for centuries due to the effect ofgreenhouse gases from past human emissions alreadypresent in the atmosphere. Limiting temperature rise willrequire substantial and sustained reductions of greenhousegas emissions.P2 Climate: Everyone's Business

Aboutthis documentThe Fifth Assessment Report from theIntergovernmental Panel on Climate Change is themost comprehensive and relevant analysis of ourchanging climate. It provides the scientific fact basethat will be used around the world to formulateclimate policies in the coming years.This document is one of a series synthesizing the most pertinent findingsof AR5 for finance and investment sectors. It was born of the belief thatinvestors and financial institutions could make more use of AR5, which islong and highly technical, if it were distilled into an accurate, accessible,timely, relevant and readable summary.Although the information presented here is a ‘translation’ of the key contentrelevant to this sector from AR5, this summary report adheres to the rigorousscientific basis of the original source material. Specific numbers and theirreferences from AR5 chapters can be found in the Endnotes.Grateful thanks are extended to all reviewers from both the science andbusiness communities for their time, effort and invaluable feedback onthis document.The basis for information presented in this overview report can be foundin the fully-referenced and peer-reviewed IPCC technical and scientificbackground reports at: www.ipcc.chPUBLISHED:June 2014FOR MORE INFORMATION:E-mail: AR5@europeanclimate.orgwww.cisl.cam.ac.uk/ipccwww.iigcc.orgwww.unepfi.orgwww.europeanclimate.orgAUTHOR:Rory SullivanREVIEWERS:IIGCC Climate Risk programmeKarsten Loeffler, Allianz Climate SolutionsSimone Ruiz, Allianz Climate SolutionsAbyd Karmali, Bank of AmericaMerrill LynchGiorgio Capurri, UniCreditRemco Fischer, UNEP FICambridge Project Team:Nicolette BartlettStacy GilfillanDavid ReinerEliot WhittingtonPROJECT DIRECTOR:Tim NuthallPROJECT MANAGER/ EDITOR:Joanna BennEDITORIAL CONSULTANTS:Carolyn Symon, Richard BlackPROJECT ASSISTANTS:Myriam Castanié, Simon McKeagneyLAYOUT DESIGN:Lucie Basset, BurnthebookINFOGRAPHIC:Carl De Torres Graphic DesignIMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P3

KeyFindingsClimate change will affect all sectors of the economy, and isrelevant to investors and financial institutions. However, not allmacroeconomic changes and microeconomic conditions will applyequally to all investments.There are risks and opportunities associated with policy measuresdirected at reducing greenhouse gas (GHG) emissions. To meetthe internationally agreed target of keeping the global averagetemperature rise since pre-industrial times below 2°C, patternsof investment will need to change considerably. This will includesignificant decreases in investment in fossil fuel extraction andconventional fossil fuel-based power generation, and significantincreases in investment in low-carbon energy and energy efficiency.Physical impacts of climate change will affect assets andinvestments. Climate change and extreme weather events willaffect agriculture and food supply, infrastructure, precipitationand the water supply in ways that are only partially understood.Decisions made by private sector investors and financialinstitutions will have a major influence on how society respondsto climate change.There will be significant demand for capital, with governmentslooking to the private sector to provide much of it. To keep theglobal temperature increase below 2°C, additional investmentrequired in the energy supply sector alone is estimated to bebetween USD 190 and 900 billion per year through to 2050 1 ,accompanied by a significant shift away from fossil fuels towardslow-carbon sources such as renewables and nuclear.P4 Climate: Everyone's Business

ExecutiveSummaryInvestors andFinancialInstitutionsThis report focuses onprivate sector providers (orsources) of capital, and theintermediaries responsiblefor deployment of this capital.These intermediaries includebanks and asset managers.Asset owners include pensionfunds, insurance companies,sovereign wealth funds,mutual funds and foundations.Together these investors andfinancial institutions managethe pensions and savings ofindividual citizens.Investors and financial institutionsare, and will continue to be,exposed to downside risks as aresult of climate change. The risksinclude: macroeconomic impactssuch as the expected reduction inproductivity and economic growthin many developing countries,direct physical impacts of climatechange such as flood and stormrisks to coastal populationcentres, and the impacts of policymeasures directed at reducingGHG emissions from electricitygeneration, large industrialsources, transport and othereconomic sectors.The investment consequencesmay include dramatic reductionsin the value of particular assets,such as conventional coal-firedpower stations that are no longerpermitted to operate becauseof constraints on their GHGemissions. There will be indirectand knock-on effects of climatechange, such as the threat tosocial stability posed by high andvolatile food prices resulting fromchanges in agricultural patterns.Climate change also presentsopportunities for investors andfinancial institutions. Policymeasures directed at reducingGHG emissions are likely toincrease opportunities forinvestment in areas such asrenewable energy and energyefficiency, and in companies withexpertise in areas such as floodprevention or flood response.More generally, irrespective of thespecific policy measures adopted,it is likely that governments willlook to the private sector to providemuch of the capital required toreduce emissions and to address,or respond to, the physical impactsof climate change.The investment (or capitalallocation) decisions thatinvestors and financialinstitutions make will be criticalin determining how societyresponds to climate change.This is particularly importantfor investments in areas suchas infrastructure and powergeneration, where assets oftenhave ‘planned lifetimes’ of manydecades. Investment decisionsmade now are likely to continueto have a major influence oninfrastructure, GHG emissionsand society in 2050 and beyond.IMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P5

PhysicalImpactsof ClimateChangeGovernments arelikely to look to theprivate sector toprovide much of thecapital required todeliver significantreductions inGHG emissionsand respond tophysical impactsof climate change.Exposure of Investors and Financial InstitutionsSea-level rise, floods and droughtBetween the 1950s and 1990s, the annualeconomic losses from large extreme weatherevents, including floods and droughts,increased ten-fold. In the period from 1990 to1996 alone, there were 22 floods with lossesexceeding US dollar (USD) 1 billion each 2 .The Low Elevation Coastal Zone (LECZ) isparticularly exposed to the effects of climatechange. This zone constitutes 2% of theworld’s land area but contains 10% of itspopulation. The number of people exposedto the 1-in-100 year extreme sea-level event(i.e. the sea level that has a 1% chance ofbeing exceeded every year) increased by 95%between 1970 and 2010. By 2010, about 270million people and USD 13 trillion worthof assets were exposed to the 1-in-100 yearextreme sea-level event 3 . It is estimated thatover USD 3 trillion in port infrastructureassets in 136 of the world’s largest port citiesare vulnerable to extreme weather events.A number of studies have projected thatmean annual insured heavy rainfall andflood losses will rise in countries such as theUK, the Netherlands and Germany, and inspecific regions such as southern Norwayand the Canadian province of Ontario.These increases are partially attributableto climate change but also reflect socioeconomictrends such as income growthand consequent increases in the assetsexposed to floods and droughts, migrationto areas (e.g. coastal cities) that are exposedto these impacts, and increases in the levelof insurance coverage.Changes to rainfall patterns are projectedto increase both flooding and drought indifferent parts of the world, with escalatingimpacts for economic sectors includingagriculture. A changed and more variablewater supply is likely to affect electricitygeneration from fossil fuel, nuclear andhydropower sources, with additionalinvestment needed for adaptation.P6 Climate: Everyone's Business

Food securityClimate impacts on agriculture from factorssuch as changing rainfall patterns, risingtemperatures and movement of crop pestsare expected to lead to higher prices andincreased volatility in agricultural markets.These will affect the cost base of manycompanies (retailers, food processors etc.)and may mean that higher proportions ofhousehold incomes are spent on food, withknock-on effects for expenditure in otherareas. Higher and more volatile prices mayalso affect socio-political stability (e.g. thepotential for food riots in some countries).Labourlost to the need for rest breaks in South EastAsia 4 . These changes could significantlyreduce economic output in sectors involvingheavy labour (e.g. construction), or mayrequire significant investments (e.g. incooling equipment) to enable economicoutput to be maintained.LiabilityInvestors and financial institutions may wishto consider how climate change might affecttheir liabilities. For example, the effects ofchanging climatic conditions on individuals’health may affect their ability to work, orneed for health insurance.The importance of considering indirecteffects is illustrated by the impacts ofenvironmental heat stress on labour capacityand productivity. Worker productivity hasalready declined during the hottest andwettest seasons in parts of Africa and Asia.By 2050, more than half of the afternoonhours of outdoor work are projected to beIMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P7

Climate Change - Everyone's Business Implications for Investors and Financial InstitutionsClimate Change: Investors and Financial InstitutionsImpacts of climate change can have significant effects on investmentsby introducing previously unforeseen risks. Policies to restrain climatechange can also affect investments. However, opportunities are likelyto open up in fields such as renewable energy and energy efficiency.ImpactsPhysical risks and policy measures couldhave major impacts on investors and financialinstitutionsIntegrationEffective responses to climate change willrequire major capital investment and financeCLOSEDExtremeWeather EventsBetween the 1950sand 1990s, theannual economiclosses from largeextreme events,such as floods anddroughts, increasedten-fold. In the period1990 to 1996 alone,there were 22 floodswith losses exceedingUSD 1 billion each.Stranded AssetsAssets becomestranded for anumber of differentreasons: they canbe supplanted bygreener alternativesor technologicalinnovations, or insectors experiencingchange due to newregulations orresource constraints.Food SecurityClimate impactson agriculture areexpected to lead tohigher prices andincreased volatility inagricultural markets.Higher and morevolatile prices mayaffect socio-politicalstability.Scale of theChallengeTo keep the globaltemperature increasebelow 2°C, additionalinvestment requiredin the energy supplysector alone isestimated to bebetween USD 190and 900 billion peryear through to 2050.New Sourcesof Capital?USD 340 billionwas invested inreducing global GHGemissions in 2011/12,with some 62% ofthis amount providedby the private sector.Changing Patternsof InvestmentThe energy supplysector is likely tosee a significant shiftaway from fossilfuels towards nuclearand low-carbonsources such asrenewables. In 2012,renewables made upmore than half ofworldwideinvestment in theelectricity sector.

Key Findings from the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5)For more information please visit cisl.cam.ac.uk/ipccImpactsIntegrationand ResponseUncertaintyInfluenceResponding to Climate ChangeInvestors and financial institutions will continue tobe exposed to downside risks as a result of climatechange. Investment consequences may includedramatic reductions in the value of particular assetsand, for banks, reductions in the creditworthinessand solvency of clients. However, they may alsoinclude new openings and opportunities.UncertaintyInfluenceThe specific investment made and thefinancing mobilised will depend ongovernment policyInvestors’ and financial institutions’ decisionsare a critical influence on society’s response toclimate changePolicy SignalsThe amount ofcapital required andallocated foremissions reductionand in addressingthe physical impactsof climate changewill depend on thespecific policymeasures adopted.MacroeconomicImpactsThere are significantchallenges inestimating the globaleconomic impactsfrom climate change– both in terms of thecosts associated withthe physical impactsand in terms of thecost of GHGemissions mitigation.Trade-offsDecouplingeconomic growthfrom GHG emissionswill have profoundimplications forcapital allocationdecisions andrisk-adjusted returns.ExpectationsGovernments arelikely to look to theprivate sector toprovide much of thecapital required todeliver significantreductions in GHGemissions and torespond to physicalimpacts of climatechange.DependenciesDecisions made byprivate sectorinvestors andfinancial institutionswill have a majorinfluence on howsociety responds toclimate change.InvestmentsThe willingness ofprivate investors andfinancial institutionsto provide this capitalwill depend on therisk exposure ofpotential investments,including policy risk,and on the incentivesthat are provided.

ResilienceMany of the major adaptation-related investments such asflood protection have the classic characteristics of public goods.That is, the benefits accrue widely rather than specifically tothe organisation making the investment. There are compellingmacroeconomic arguments for protecting large parts of theworld’s coastline against flood damage and land loss, but thereis often a weak case for individual private sector investors andfinancial institutions supporting these investments. In practice,for the private sector to play a meaningful role in financing suchinvestments requires significant levels of public support throughthe provision of capital, other financial support, and by allowingthe private sector to capture at least some of the benefits fromthe investment.A Comment on theEconomicsThere are significant challenges inestimating the global economic impactsfrom climate change – both in terms ofthe costs associated with the physicalimpacts and in terms of the cost ofGHG emissions mitigation. Estimatesof the aggregate economic impacts ofclimate change and estimates of thecosts of mitigation both vary widely,and are highly dependent on factorssuch as core assumptions, modeldesign, sectoral coverage and scenarioselection. Specifically on climate changeimpacts, economic estimates often donot account for catastrophic changes,tipping points, and other relevant factors(and, therefore, may underestimatecosts). The IPCC comments thatprojected losses associated withadditional warming of around 2°C aremore likely than not to be greater, ratherthan smaller, than the best estimates todate. It further notes that while lossesaccelerate with greater warming, fewquantitative estimates have beencompleted for additional warming ofaround 3°C or above.P10 Climate: Everyone's Business

ReducingGreenhouseGas EmissionsOpportunities and Risks for Investorsand Financial InstitutionsThe IPCC estimates that approximatelyUSD 340 billion was invested in mitigatingclimate change in 2011/12, with 62% of thisamount provided by the private sector 5 . It isimportant to qualify this statement by notingthat these numbers include all financial flowswhose expected effect was to reduce netemissions and/or to enhance resilience to theimpacts of climate variability. That is, thesenumbers cover the full value of the financialflow rather than the share associated withthe climate change benefit. For example, theycover the entire investment in a wind turbine(which may also contribute to improvedsecurity of electricity supply) rather than theproportion of the investment attributed toemission reductions.Policies aimed at decoupling economicgrowth from GHG emissions will haveprofound implications for capital allocationdecisions. A transformation to a lowcarboneconomy implies new patterns ofinvestment, requiring increased investmentin areas such as renewable energy andreduced investments in areas such fossilfuel extraction and conventional fossil fuelbasedpower generation. In order to keep theglobal average temperature rise since preindustrialtimes below 2°C, the additionalinvestment required in the energy supplysector is estimated to be between USD 190and 900 billion per year through to 2050 6 ,accompanied by a significant shift away fromfossil fuels towards low-carbon sources suchas renewables, nuclear and fossil fuel burningwith carbon capture and storage (CCS), andtowards energy efficiency. Constraints on theuse of fossil fuels would affect the price ofcommodities such as coal and oil, and haveconsequent implications for the mining, oiland gas companies in investors’ portfolios.IMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P11

BETWEEN 2005 AND2012, 67% OF GLOBALGHG EMISSIONS WERECOVERED BY SOMEFORM OF LEGISLATION ORNATIONAL STRATEGYUSD 340 BILLIONWAS INVESTED INMITIGATING CLIMATECHANGE IN 2011/12THE ADDITIONALINVESTMENT REQUIREDIN THE ENERGY SUPPLYSECTOR IS ESTIMATED ATUSD 190–900 BILLION PERYEAR TO 2050Policies aimedat decouplingeconomic growthfrom GHG emissionswill have profoundimplications forcapital allocationdecisions.This transformation to a low-carboneconomy may result in ‘stranded assets’,where the value of these assets issignificantly reduced because they arerendered obsolete or non-performing.Energy intensive sectors and fossil fuelbasedindustries are particularly exposed tothis risk. In the case of the electricity sector,coal-fired power stations may be strandedfor a variety of reasons including increaseduse of renewable energy (which displaceselectricity from coal), energy efficiency(which reduces demand for electricity) anddirect regulation of GHG emissions (whichmay reduce operating hours or permittedelectricity output).Private finance has a critical role to playin financing the transition to a low-carboneconomy, which brings both market andnon-market benefits such as improvedenergy security, enhanced employmentand better air quality.The willingness of the private sector toprovide this finance, however, is dependenton public policy and the wider politicaland institutional context within whichinvestments are made. There has been aconsiderable increase in national policiesand institutions to address climate changein the period 2005 to 2012, with the IPCCestimating that some 67% of global GHGemissions are now covered by some formof legislation or national strategy. 7 Manyof these policies and strategies are in theearly stages of implementation and there isinadequate evidence to assess their impacton future emissions.Investors are likely to consider whetherpolicies provide clear incentives forinvestment through creating new marketsor business obligations, or whether to delayor reduce investment because policies createrisk and uncertainty.Investors pay close attention to:• the returns that can be achieved and tothe policy risks associated with theseinvestments, in particular the level anddependability of public support• to the robustness of the institutionsand organisations responsible forimplementing policy• the technological and operational risks, inparticular when dealing with newer or lessproven technologies.P12 Climate: Everyone's Business

Climate change presentsreal risks and opportunities.ConclusionClimate change presents real risks andopportunities for investors and financialinstitutions across all asset classes andacross all time frames including the veryshort-term. Despite uncertainties in theprojected economic impacts and in theeffects on investment portfolios, it is clearthat investors and financial institutionscannot completely insulate themselvesfrom the impacts of climate change on theirinvestments. There is a need to analysethe risks and opportunities to investmentspresented by the physical impacts of climatechange and by policy measures directedat reducing GHG emissions. Investors andfinancial institutions will then be able torespond to these risks and opportunities.Climate change is likely to significantly alterpatterns of capital investment. As warmingincreases, transport, processing and retailingare all potentially affected as links in thesupply chain are exposed to climate risks,such as disruption of operations and the needfor more extensive temperature control.It is estimated that to keep the rise in globalaverage temperature since pre-industrialtimes below 2°C, an additional investmentof between USD 190 and 900 billion peryear through to 2050 would be required inthe energy supply sector alone. Significantamounts of capital will also be required inorder to respond to climate change.Governments are likely to look to theprivate sector to provide much of the capitalrequired to deliver significant reductionsin GHG emissions and to support efforts toaddress, or respond to, the physical impactsof climate change. While the societal casefor action is clear, the willingness of privateinvestors and financial institutions toprovide this capital will depend on how theyview the risks associated with policy and theincentives provided.IMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P13

GlossaryADAPTATIONThe process of adjustment to actualor expected climate and its effects.In human systems, adaptation seeksto moderate or avoid harm or exploitbeneficial opportunities. In naturalsystems, human intervention mayfacilitate adjustment to expectedclimate and its effects.CLIMATE CHANGEAny significant change in climatethat persists for an extended period,typically decades or longer.CLIMATE IMPACTThe effects of climate change onnatural and human systems.DOWNSIDE RISKThe amount of financial loss that couldbe sustained by an investor as a resultof the decline in the value of an asset orinvestment.ENERGY SECURITYThe goal of a given country, or theglobal community as a whole, tomaintain an adequate, stable, andpredictable energy supply.FOSSIL FUELCarbon-based fuel from fossilhydrocarbon deposits, including coal,peat, oil, and natural gas.GREENHOUSE GAS (GHG)A gas in the atmosphere, of naturaland human origin, that absorbs andemits thermal infrared radiation.Water vapour, carbon dioxide, nitrousoxide, methane and ozone are themain greenhouse gases in the Earth’satmosphere. Their net impact is to trapheat within the climate system.MITIGATIONA human intervention to reduce thesources or enhance the sinks ofgreenhouse gases.PRE-INDUSTRIAL PERIODThe period before 1750, that is, beforethe period of rapid industrial growthreferred to as the ‘industrial revolution’.PROJECTIONA potential future evolution of a quantityor set of quantities, often computed by amodel. Projections involve assumptionsthat may or may not be realized, andare therefore subject to substantialuncertainty; they are not predictions.RENEWABLE ENERGYAny form of energy from solar,geophysical or biological sources thatis replenished by natural processesat a rate that equals or exceeds itsrate of use.RESILIENCEThe capacity of social, economic,and environmental systems to copewith a hazardous event or trend ordisturbance, responding or reorganizingin ways that maintain their essentialfunction, identity, and structure.STRANDED ASSETAn asset that has become obsolete, ornon-performant, but must be recordedon the balance sheet as a loss of profit.TIPPING POINTA hypothesised critical threshold whenglobal or regional climate changesfrom one stable state to anotherstable state. The tipping point eventmay be irreversible.P14 Climate: Everyone's Business

ENDNOTES1IPCC AR5 WG III, Chapter 72IPCC AR5 WG II, Chapter 103IPCC AR5 WG II, Chapter 54IPCC AR5 WG II, Chapter 105IPCC AR5 WG III, Chapter 166IPCC AR5 WG II, Chapter 107IPCC AR5 WGIII, Chapter 15IMPLICATIONS FOR INVESTORS AND FINANCIAL INSTITUTIONS P15

“Continued emissions of greenhouse gases will cause furtherwarming and changes in all components of the climate system.Limiting climate change will require substantial and sustainedreductions of greenhouse gas emissions.”IPCC, 2013About us:Disclaimer:This publication has been developed and released by theEuropean Climate Foundation (ECF), the InstitutionalInvestors Group on Climate Change (IIGCC), the UnitedNations Environment Programme Finance Initiatives(UNEP FI) and the University of Cambridge’s JudgeBusiness School (CJBS) and Institute for SustainabilityLeadership (CISL).This project was initiated and financed by ECF andendorsed by CJBS and CISL.The family of summaries, of which this report is part, isnot meant to represent the entirety of the IPCC’s FifthAssessment Report (AR5) and they are not official IPCCdocuments. The report is not intended to provide, andshould not be relied on for accounting, legal or tax adviceor investment recommendations. IIGCC is not providinginvestment advice.The summaries have been peer-reviewed by experts bothfrom the business and science communities. The Englishversion constitutes the official version.The University of Cambridge Institute for SustainabilityLeadership (CISL) brings together business, government andacademia to find solutions to critical sustainability challenges.Cambridge Judge Business School (CJBS) is in the businessof transformation. Many of our academics are leaders intheir field, creating new insight and applying the latestthinking to real-world issues.The Institutional Investors Group on Climate Change(IIGCC) is a forum for collaboration on climate change forinvestors. IIGCC provides investors with a collaborativeplatform to encourage public policies, investment practices,and corporate behaviour that address long-term risks andopportunities associated with climate change.UNEP FI is a global partnership between UNEP and the financialsector. Over 200 institutions, including banks, insurers andfund managers, work with UNEP to understand the impactsof environmental and social considerations on financialperformance. Through its Climate Change Advisory Group(CCAG), UNEP FI aims to understand the roles, potentials andneeds of the finance sector in addressing climate change, andto advance the integration of climate change factors - both risksand opportunities – into financial decision-making.For more information:E-mail: AR5@europeanclimate.orgwww.cisl.cam.ac.uk/ipccwww.iigcc.orgwww.unepfi.orgwww.europeanclimate.orgReproduction and use: The materials can be freely used to advancediscussion on the implications of the AR5 and consequences for business.The report is made available to any and all audiences via the CreativeCommons License BY-NC-SA. This document is available for download fromthe CISL website: www.cisl.cam.ac.uk/ipcc.