IPCC Report – The Implications for Investors

The Intergovernmental Panel on Climate Change (IPCC) have published a report that predicts in stark terms both the historic and predicted changes to the earth’s climate from human activities. This is what they say in the accompanying press release: “Scientists are observing changes in the Earth’s climate in every region and across the whole climate system, according to the latest Intergovernmental Panel on Climate Change (IPCC) Report, released today. Many of the changes observed in the climate are unprecedented in thousands, if not hundreds of thousands of years, and some of the changes already set in motion—such as continued sea level rise—are irreversible over hundreds to thousands of years”.

However they also say that “strong and sustained reductions in emissions of carbon dioxide (CO2) and other greenhouse gases would limit climate change. While benefits for air quality would come quickly, it could take 20-30 years to see global temperatures stabilize”.

Although there are a few people who do not accept the scientific consensus in the IPCC report, Governments are likely to accept the findings and implement policies accordingly. This is already happening with the UK being at the forefront of measures to reduce carbon emissions which are seen as the main cause of global warming. With the UK Government’s “net zero by 2050” policy we are already seeing major impacts and the imposition of enormous costs on many aspects of our life. All of this is reinforced by media coverage of floods and wild fires that are typically blamed on climate change.

Many such reports are anecdotal in nature – they may simply be random events that occur for non-specific reasons, while reporting of such events is now more common in the modern connected world. But the IPCC report does say “It is virtually certain that hot extremes (including heatwaves) have become more frequent and more intense across most land regions since the 1950s, while cold extremes (including cold waves) have become less frequent and less severe, with high confidence that human-induced climate change is the main driver of these changes”. They also say that heavy precipitation events have increased since the 1950s over most land areas and it is likely that human-induced climate change is the cause. It has also contributed to increases in agricultural and ecological droughts.

The IPCC report is effectively a call for action and that will no doubt be reinforced by the upcoming COP26 summit in Glasgow in November where politicians will be promoting their virtuous visions no doubt. Whether they turn into actions remains to be seen – the past experience suggests they may only turn into token gestures. Economic decisions often thwart the best policies.

What happens if we don’t cut CO2, and methane and other carbon emissions? The IPCC report gives a number of scenarios based on scientific models of differing levels of emissions. Under the high and very high GHG emissions scenarios, global warming of 2°C (relative to 1850– 1900) would be exceeded during the 21st century. Global warming of 2°C would be extremely likely to be exceeded in the intermediate scenario and under the very low and low GHG emissions scenarios, global warming of 2°C is unlikely to be exceeded.

That might seem to be good news, but because of the time lag of the impact of changes in emissions, under the high emissions scenario their best estimate is of a temperature rise of 2.4 °C by 2041-2060 and 4.4 °C by 2081-2100. The latter would be disastrous for many parts of the world with increases in the intensity and frequency of hot extremes (heatwaves and heavy precipitation). The Arctic might become ice free in summer under all the scenarios and sea levels will rise “for centuries to millennia due to continuing deep ocean warming and ice sheet melt”. This could mean a rise of 2 to 3 metres in sea levels if warming is limited to 1.5 °C or 19 to 22 metres with 5 °C of warming!

With so many of the world’s cities on seaboards you can see that flood defences may be totally inadequate to cope with such rises and incapable of being built to resist them. Investments in City of London property would be one casualty. The current Thames flood barrier may be overwhelmed in future years even if GHG emissions stop growing.

The changes will likely affect the Northern Hemisphere more than the Southern, and there is some good news. For example, the reports says that the growing season has lengthened by two days per decade since the 1950s in the Northern Hemisphere. Farming might extend further north and unproductive land brought into use, but droughts might also remove a lot of marginal land from farming activity. These impacts will be greatly affected by the increase in GRH emissions.

Who can really affect the emissions? Only the big emitters such as the USA, China and Russia can have much impact. The UK produces less than 2% of world emissions.

Does the decarbonisation of transport, particularly in the UK, help at all? In reality not. For example, converting users to electric cars is likely to have minimal impact because the energy requirement and associated CO2 emissions to construct the batteries and make the steel for the car bodies offsets most of the likely benefit. The cost of building a network of charging points and enhancing the electric grid to cope will also be high. Investing in electric car makers or buying electric cars is not going to save the planet.

Is it worth considering investing in disaster insurers, although there are now few such listed vehicles? Munich Re produced a good report on this area which you can read here: https://www.munichre.com/en/risks/natural-disasters-losses-are-trending-upwards.html . An interesting point they make is that less than half of all losses are insured and it is even less in developing countries. It is very clear that poorer countries in less developed markets are those that are going to suffer from more extreme weather events and rising sea levels.

The big problem which the IPCC report does not cover is that GRH emissions are directly related to the size of the human population and their activities. Particularly what they consume, where they live and how they earn an income.  

Unless there is a concerted effort to halt the growth in population and to restrict urbanisation, I doubt that the growth in GRH emissions will be halted. More population means more farming to feed the people and that is a big contributor to methane emissions which is a significant GRH factor (this is highlighted in the latest IPCC report). Similarly construction of homes and offices is a big contributor. Nobody has yet figured out how to produce cement without generating carbon. Hence the suggestion that we should revert to constructing houses out of wood. Investing in growing trees for timber might be one interesting investment approach to look at. But that is a 20+ years project and it can take 50 years to grow to harvestable size for timber, or longer in northern latitudes.

In conclusion, it’s worth reading the IPCC report (see link below) and pondering how you think the Government should deal with these issues. Please don’t fall into the trap of encouraging your local council to declare a “climate change emergency” as some have already done. Their initiatives such as closing roads to restrict traffic and persuading everyone to cycle will have no impact whatsoever. Gesture politics is what we do not need.

Even the UK Government alone will have no impact unless they can persuade other major countries to take suitable steps. But will they is the key question?  If they don’t all we can do is to try to mitigate the impacts by weather proofing our properties and the transport network while purchasing air conditioning to cope with the heatwaves.

I am sure some readers of this article will consider that I am being too defeatist and that we can all contribute to reducing the problem by eating less meat, looking at the food miles of what we consume, cutting out long holiday flights, changing your central heating boiler, reducing investments in oil/gas/coal producers and other peripheral affectations. But only Governments can really tackle the problem which we should all encourage them to do.

IPCC Sixth Assessment Report: https://www.ipcc.ch/assessment-report/ar6/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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