What is climate change and why does it matter?
At its simplest, climate change refers to a large-scale, long-term shift in the Earth’s weather patterns and temperature. The physical effects of climate change – longer heatwaves and droughts, extreme winters, more frequent and intense storms, flooding, and rising sea levels – are clearly felt across the world today. Climate change disrupts economies and communities, often affecting the poorest and most vulnerable segments of society.
Exhibit 1: Many parts of the world are experiencing record high temperatures
Note: Map shows how a particular location’s average temperature in August 2019 compares with the same month in previous years, with at least 80 years of data for each location.
Source: NOAA National Centers for Environmental Information, Global Climate Report – August 2019.
Recent developments indicate that a greater sense of urgency is taking hold, driven by national commitments made following the landmark 2015 Paris climate agreement, which sets the ultimate goal of capping global warming at 1.5°C (or “well below” 2°C) above pre-industrial levels, as well as the growing international momentum of climate action campaigns such as that led by Swedish environmentalist Greta Thunberg.
Other efforts such as the Science Based Targets initiative and the Task Force on Climate-related Financial Disclosures aim to help businesses contribute to positive climate change outcomes and manage climate risks by supporting them with technical expertise.
This urgency is necessary. Recent climate trends are worrying: 2015 to 2019 are the five hottest years on record, latest World Meteorological Organization data show, and the five-year period 2015-2019 is already 1.1°C warmer, on average, than pre-industrial times. Temperatures over land, where most human activity takes place, have risen by even more than the global average surface temperatures show.
The bulk of this is man-made; human activity has caused about 1.0°C of global warming above pre-industrial levels, according to the Intergovernmental Panel on Climate Change (IPCC).
Adding to the worry, emissions of carbon dioxide (CO2) – the primary greenhouse gas that traps heat in the atmosphere and increases global warming – from fossil fuel use and industry are at an all-time high.
To stabilize global temperature at any level, net CO2 emissions need to be reduced to zero; this requires sharp emissions declines across the full range of economic activity including power generation, industry, transport and agriculture, and potential support from new technologies to remove CO2 from the atmosphere. Countries’ pledges to reduce their emissions are currently insufficient to limit global warming to 1.5°C, a recent IPCC special report warns.
“The climate emergency is a race we are losing, but it is a race we can win,” United Nations Secretary-General Antonio Guterres said at the UN Climate Action Summit in late September. “Limiting warming to 1.5°C is still possible. But it will require fundamental transformations in all aspects of society – how we grow food, use land, fuel our transport and power our economies.”
Exhibit 2: Global fossil CO2 emissions are at an all-time high
Notes: Growth rates are compound annual growth rates over the specified period. Grey band shows levels 5% above/below emissions estimates to indicate uncertainty in the emissions estimates.
Source: EU Emissions Database for Global Atmospheric Research (EDGAR), Bank of Singapore.
In Singapore, Prime Minister Lee Hsien Loong has emphasized the gravity of the threat to the island nation, noting that climate change defenses should be treated as seriously as the country’s military defenses. “These are life and death matters,” he said in his August National Day Rally Speech.
Risks to businesses
Today, businesses are already vulnerable to company- and sector-specific climate risks. A simple example would be milder winters or longer summers disrupting order-book visibility for apparel manufacturers and clothing retailers.
While troublesome, such issues pale in comparison to the potential damage to business assets or entire economies from more frequent flooding, hurricanes, droughts and – over the longer term – rising sea levels. Slower-moving, structural changes to the environment due to climate change could fundamentally alter the viability of companies’ operating models. Beyond the potential damage to businesses, these changes also threaten to disrupt food production and displace entire populations, with far-reaching implications for social stability.
Rising seas and greater storm surges could force hundreds of millions of people in coastal cities from their homes, with a total cost to coastal urban areas of over US$1 trillion each year by 2050, according to the Global Commission on Adaptation led by former UN Secretary-General Ban Ki-Moon, International Monetary Fund managing director Kristalina Georgieva and billionaire philanthropist Bill Gates.
Policy changes are introducing new regulatory risks for companies, especially those in sectors such as fossil fuel production (oil and gas, thermal coal), mining, power generation, and other emissions-intensive industries such as cement and chemicals manufacturing.
Proposed rules in Europe requiring investors to integrate detailed criteria to screen for economic activities that contribute to positive climate change outcomes are likely to pressure companies worldwide to enhance disclosures on climate risk management and broader environmental-related performance, or risk losing access to investment capital.
Some businesses are already exposed to the risk of having their assets lose value more rapidly than expected – known as asset stranding– due to regulatory shifts associated with climate change. Such assets could include fossil fuel and mineral reserves that become uneconomical to extract due to increased carbon and pollution taxes; power generation infrastructure and production facilities that do not meet new energy efficiency and emissions standards; and coastal property and infrastructure rendered unusable by flooding.
Overall, we believe companies will face increasing regulatory, environmental, and consumer pressures associated with climate risk, forcing them to adapt or perish. In our recent primer on sustainable investing, we observed that greater awareness and activism around environmental, social and governance issues, supported by the increasingly sophisticated use of social media, have encouraged more individuals to seek ways to shape both public policy and private business practices related to these issues.
Opportunities in adaptation
The gradual transition to a more environmentally friendly, climate-resilient global economy will reshape human activities across the world, introducing new opportunities for investment and growth.
Companies that help to design and build climate defenses, improve water and food security, and develop energy-efficient, low-emissions technology and processes are likely to attract increasing interest and investment capital.
Similarly, businesses that deliver products and services closely aligned with the longer term shift towards reducing waste and re-using natural resources – the "circular economy" - are increasingly likely to benefit from evolving consumer preferences and regulations.
Globally, investing US$1.8 trillion over the next 10 years in key areas such as food and water security and climate-resilient infrastructure could yield US$7.1 trillion of net benefits to society by limiting future climate-risk losses, in addition to generating economic, social and environmental gains, research by the Global Commission on Adaptation suggests. Early warning systems that flag incoming storms or heatwaves, for example, save lives and assets worth at least ten times their cost, it says.
As policymakers worldwide strengthen their response to the threat of climate change, we see new risks and opportunities emerging for businesses and investors. Efforts to pursue sustainable, climate-resilient development paths and reduce the threat of climate change through emissions reduction and adaptation are likely to drive wide-ranging, significant changes throughout society. Companies slow to anticipate and adjust to these changes risk being gradually sidelined by investors or, in the extreme, having their operating models upended; those that adapt successfully will benefit from the reshaped economic landscape and enjoy more sustainable business prospects, with a better chance to prosper.Disclaimer applicable to recommendation
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