investment viewpoints

    What are the top three investor takeaways from the IPCC report?

    What are the top three investor takeaways from the IPCC report?
    Christopher Kaminker, PhD - Group Head of Sustainable Investment Research, Strategy & Stewardship

    Christopher Kaminker, PhD

    Group Head of Sustainable Investment Research, Strategy & Stewardship
    Thomas Höhne-Sparborth, PhD - Head of Sustainability Research

    Thomas Höhne-Sparborth, PhD

    Head of Sustainability Research

     

    Need to know

    • The latest Intergovernmental Panel on Climate Change (IPCC) report is a call to action for investors with regards to both the need to step-up investment in climate mitigation and adaptation efforts, and the real economic consequences of the failure to prepare and adapt

    • The window of opportunities, for scenarios where climate risks can be effectively managed in a manner supportive of social and economic development, is narrowing and alternative scenarios depend largely on the ambitions of policymakers and the market

    • Much like the world needs to adapt to a changing climate, investors too must adapt their investment strategies. At Lombard Odier, we have developed proprietary Implied Temperature Rise (ITR) metrics to help us assess the alignment of investments in a way that limits warming to the levels envisaged by the Paris Agreement

     

    The world's top climate scientists have sounded an alarm that the world isn’t reducing greenhouse-gas emissions fast enough. That was one of the key messages outlined in the latest Intergovernmental Panel on Climate Change (IPCC) report released by the United Nations in the shadow of war in Ukraine.

    The scientists warn some impacts are already “irreversible” and that as many as 3.6 billion people now live in settings that are “highly vulnerable to climate change.”

    Calling the report an ''atlas of human suffering'' and ''a damning indictment of failed climate leadership'', the UN Secretary-General Antonio Guterres said: ``With fact upon fact, the report reveals how people and the planet are getting clobbered by climate change.''

    In a nutshell, the consequences of inaction on global warming are wrenchingly clear and so is the case for climate investment.

    For investors, the report is a call to action – both with regards to the need for investment in climate mitigation and adaptation efforts, and the real economic consequences of the failure to prepare and adapt. So if you are an investor, here are the top three things you need to know from the report:-

     

    1) Need for investment in adaptation is paramount

    Given the significant effects of climate change even in a 1.5 degree Celsius world – and much more dire effects in an even warmer one – preparation of infrastructure, settlements, and agricultural systems is urgently needed.

    In a number of regions, soft and hard limits to adaptation have been reached. Hard limits refer to those where ecosystems are stretched beyond their coping capacity, and cannot adapt further, with climate damage the inevitable result – as is the situation facing many coral reefs today.

    Soft limits, on the other hand, refer to circumstances where adaptation is still possible, but is constrained by financial, governance, institutional or policy constraints. Here, adaptation finance can still play a critical role.

    At COP26, negotiators agreed that a pre-existing goal of USD 100 billion in adaptation finance would act as a minimum goal through to 2025. The new IPCC report notes that actual adaptation needs are likely higher than previously estimated, with an upper end estimate of around USD 400 billion per year. A significant step-up in investment is therefore needed.

     

    2) Time is running out

    The scale of the challenge is vast, but a window of opportunity still exists, although the report authors note that it is “rapidly narrowing”. Every level of warming towards and beyond 1.5 degrees Celsius constrains opportunities for “climate resilient development pathways” – scenarios in which climate risks can be effectively managed in a manner supportive of social and economic development.

    Given existing levels of warming and historical emissions, the range of pathways available to us is now more limited than it would have been had climate action begun at pace in earlier decades. That said, a significant range of alternative outcomes remains achievable – largely as a function of the level of ambition of policymakers and the market.

    As this report emphasises, like others before it, the greater the ambition pursued, the more positive the economic and environmental outcomes will be at. Such ambition must focus first and foremost on mitigating further climate change, but investment in adaptation must be part-and-parcel of any climate resilient strategy.

    At Lombard Odier, we have outlined our conviction that investment in adaptation spending is an economic and financial imperative and have sought to reflect this conviction in our investment strategies such as the Climate Transition strategy.

     

    3) How to prepare for the transition?

    Much like the world needs to adapt to a changing climate, investors too must adapt their investment strategies. At Lombard Odier, we have developed proprietary Implied Temperature Rise (ITR) metrics to help us assess the alignment of investments in a way that limits warming to the levels envisaged by the Paris Agreement.

    Our metric has been recognised as being one of the leading approaches in the market, adding a more forward-looking perspective to the transition. We at LOIM have also included the use of ITR metrics in our Target Net Zero strategies as a key tool to assess the emissions and temperature trajectory of our investee companies.

    We also share the view of the authors of this IPCC report regarding the interconnected nature of climate change and biodiversity. Our Climate Transition strategy focuses on targeted opportunities to improve mitigation of emissions and adaptation to climate change. In parallel, our Natural Capital strategy focuses on the need to both harness and preserve nature, through the circular bioeconomy and leaner forms of industry.

     

    Discover more about our Climate Transition strategy here.

     

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