The Intergovernmental Panel on Climate Change (IPCC) has said trillions of dollars of new fossil fuel investments risk being stranded if we are to meet our climate goals. The group also warned rapid write-downs of carbon-intensive assets could affect macro-economic stability and damage the prospect of a just transition.
In its latest report, IPCC Working Group III report, Climate Change 2022: Mitigation of climate change, the IPCC stated long-lasting investments and technologies that do not have the prospect of becoming low carbon could become stranded assets.
Following on from IPCC’s working group one report in 2021 on the physical science of climate change and working group two’s report last month on impacts, adaptation and vulnerability, this paper from working group three (WG3) looks at mitigation specifically.
Speaking at the launch of the hard-hitting report, UN secretary-general Antonio Guterres called the findings “a file of shame, cataloguing the empty pledges that put us firmly on track towards an unlivable world”.
He continued: “Some government and business leaders are saying one thing but doing another. Simply put, they are lying, and the results will be catastrophic.”
Assets stranded in the trillions
Commenting on the prospect of stranded assets, IPCC WG3 vice-chair, Diana Ürge-Vorsatz, explained the risks involved in continuing to invest in fossil fuel infrastructure.
“We do show that fossil fuel infrastructure that we keep building… some of that will be stranded, which means we will not be able to use it if we want to keep global warming to 1.5°C.
“In fact, what this shows is [what we saw] when we [last] looked at literature last October, that approximately $1trn to $4trn worth of infrastructure will be stranded, which means that it will not be possible to fully return their investments.
“Building even more infrastructure either puts meeting our climate goals at risk, or will just cause even more infrastructure to be stranded and that will have a negative impact on the whole society,” said Ürge-Vorsatz.
The report authors noted the process of assets becoming stranded could have an impact on macro-economic stability and could be detrimental to efforts for a just transition. The assets at risk of being stranded are fossil fuel resources and carbon-intensive assets such as power plants and cars.
A summary of the report stated: “In this context, coal assets are projected to be at risk of being stranded before 2030, while oil and gas assets are projected to be more at risk of being stranded toward mid-century. A low-emission energy sector transition is projected to reduce international trade in fossil fuels.”
Greenwashing
Guterres echoed the report when noting gaps between what governments and businesses say and do on climate change need to be addressed in order to make use of the narrowing window for climate change mitigation.
Inger Andersen, executive director for the UN Environment Programme, said future financial security depends on tackling greenwashing: “We are very clear that it is easy to make the claim when harder to deliver on this claim, whether it’s on the government side or on the banking side.
“But what this report makes absolutely clear is that unless we do so, we will not be having the security of the investments that people have made for the… proverbial day after tomorrow.”
On the subject on net-zero targets specifically, the IPCC report authors found companies projecting targets for sustainability, such as to be net zero on carbon emissions, could be doing so for reputational gains and may not have clear plans for reaching those goals.
More mobilisation needed
Despite financial flows for climate mitigation and adaptation increasing by up to 60% between 2013/14 and 2019/20, the IPCC said growth has slowed since 2018 and flows heavily focus on mitigation, are uneven and are different depending on which sector and region you are looking at.
There is also simply too little money going into these areas, according to IPCC vice-chair, Ramón Pichs-Madruga:
“Our assessment shows that financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming below 1.5°C or 2°C. But there is sufficient global capital available and liquidity to close investment gaps. Clear signalling from government and the international community, including strong alignment of public sector finance and policies is critically important,” he told the press.
The summary for policymakers stated: “Public and private finance flows for fossil fuels are still greater than those for climate adaptation and mitigation.”
Looking at the broader market for green bonds, ESG and sustainable finance products, IPCC said this has significantly expanded since 2014. However, the group also noted: “Challenges remain, in particular around integrity and additionality, as well as the limited applicability of these markets to many developing countries.”
Carbon capture and behaviour change
Seb Beloe, partner and head of research at WHEB Asset Management said in many ways the report was “totally predictable” in saying the target of limiting global warming to 1.5°C is almost out of reach. But he said the report helpfully shows how we can make rapid and deep cuts in greenhouse gas (GHG) emissions across all sectors and avoid catastrophic global warming, with some countries having already delivered real, sustained decreases in GHGs.
Beloe noted behaviour change and carbon capture are essential: “The report also talks about behaviour change including eating less meat and less flying and the now critical importance of carbon capture. There are now no 1.5°C scenarios without the use of carbon capture – and most now involve some level of overshoot before bringing warming back down below 1.5°C.”
Finance the solutions
Shelagh Whitley, chief sustainability officer at the Principles for Responsible Investment, commented on the necessity of changing patterns of fossil fuel investments: “To avoid a dangerous increase in emissions, we must cease new investments in fossil fuels and increase financial flows towards assets which facilitate the low carbon transition.”
Whitely was also encouraged by the solutions laid out in the report that would enable us to halve emissions by 2030 and said it was now a case of urgently financing the solutions.
“Investors have a leading role to play in this process. The IPCC report notes that investors are raising awareness of climate change as a financial risk. However, climate-related financial risks, whether from physical climate impacts or from a disorderly transition to a low carbon economy, are still greatly underestimated by parts of the industry.”
Amir Sokolowski, global director for climate change at CDP, emphasised the timeframe within which action must be taken: “Governments cannot wait for more scientific reports or red alerts – a focus on immediate emission reductions is now more than critical.
“Governments were given an unprecedented opportunity as a result of COP26 to update their Nationally Determined Contributions (NDCs) on an annual basis. They must capitalize on this and update their NDCs in line with 1.5°C by the end of 2022, with robust roadmaps and policies to support their delivery.”
This article first appeared on our sister publication ESG Clarity
