Responding to the IPCC Report: how investors can support the low-carbon energy transition

The recent report from the UN Intergovernmental Panel on Climate Change (IPCC) provides yet another adrenaline shot to investors on the importance of embedding environmental concerns in their investment strategy.

The report pulls together the findings from more than 14,000 studies to show the links between human-caused warming and increasingly severe extreme weather.

This severe weather, paired with other costs of climate change, creates multiple risks to investors. These include the added direct costs facing companies related to changes in climate and the impacts of policies and regulations implemented to combat climate change. The risks to portfolio companies can be broadly categorised into physical, regulatory and technological climate risks. At the same time, climate change also creates investment opportunities for investors and portfolio companies alike, for instance in the areas of renewable energy and energy storage.

The report provides an extremely concerning outlook on the climate emergency. However, as the world looks ahead to the upcoming UN Climate Summit (COP26), the report also offers some hope. The report’s author, Professor Piers Forster, asserts that scientists are “really certain” that emissions cuts can “reduce the rate of unprecedented warming”. As investors, we can support the energy transition through our capital allocation, our engagement with portfolio companies and through policy dialogue. At Rathbone Greenbank Investments, we are committed to unlocking financing for companies that will contribute to this just transition whilst generating returns on investments.

"The IPCC was created to advise governments on the risk of climate change and to put forward adaptation and mitigation options."

What is the UN Intergovernmental Panel on Climate Change (IPCC)?

The IPCC was created to advise governments on the risk of climate change and to put forward adaptation and mitigation options. It collates the findings of reputable scientists worldwide and provides credible, politically neutral recommendations of possible solutions. The report outlines five different scenarios, or ‘pathways’, that the planet could go down over the next century. Which pathway we follow will be decided by our ambition today, and the actions we take globally to control energy use, air pollution control, land use and greenhouse gas emissions.

In the most optimistic scenario, global temperature rise will peak at 1.6 degrees, still above the Paris Agreement target of 1.5 degrees. More concerningly, in the least optimistic scenario, temperature rises could reach 5.7 degrees by 2100. This would result in catastrophic and economically devastating climate events such as rising sea levels and increased rainfall.

One of the key messages in this year’s report is that net zero is a powerful mechanism for limiting this damage, and that reducing CO2 emissions, as well as those of other greenhouse gases such as methane, is crucial for both health and climate. As investors we have a great opportunity to contribute to reducing emissions by participating in the low carbon energy transition.

The low-carbon energy transition

To bring down emissions it is crucial that we cut our consumption of fossil fuels. At Greenbank we have been investing for years in the companies and sectors driving the transition. The economic case for financing the low-carbon energy transition is strong. On a case-to-case basis low-carbon alternatives are quickly catching up with their outdated competitors in terms of cost, profitability and reliability. Solar and wind are now the cheapest source of bulk energy generation for about 85% of the world. Low-carbon energy sectors have the added bonus of being protected and supported by governments who know that they need to do more to protect the planet. This means increasing subsidies rather than increasing taxes and, in most cases, a far reduced risk of future legislation that will hinder companies in those sectors.

What is Greenbank doing?

The low-carbon energy transition is reflected in several of Greenbank’s sustainable development themes that we use to guide our investment decisions. For example, our theme of ‘energy and climate’, centres around promoting clean energy, while ‘innovation and infrastructure’ enables us to invest in companies lowering energy carbon through other means, such as by improving public transport systems.

Greenbank joined the Net Zero Asset Managers Initiative in March 2021, a global coalition of 73 investors representing over $32 trillion AUM that are committed to reducing greenhouse gas emissions. The overarching goal is to limit global temperature rise to the Paris Agreement target of 1.5 degrees.  

In order to fulfil the requirements of the initiative, Greenbank will be using the net zero investment framework, which it helped to develop alongside IIGCC and several other investors in 2019 and 2020 as part of the Paris Aligned Investment Initiative. There are five core components of the Framework: objectives and targets, strategic asset allocation and asset class alignment, alongside policy advocacy and, investor engagement activity and governance.

"Solar and wind are now the cheapest source of bulk energy generation for about 85% of the world."

Signatories are also encouraged to create investment products aligned with net zero emissions by 2050 or sooner and encouraging investment in climate solutions. The initiative is also implementing a shared stewardship and engagement strategy consistent with these goals. All members are setting interim targets for 2030 for assets to be managed in line with the 50% global emissions reduction target set out in the IPCC report. Our specific targets will be announced later this year, ahead of COP 26.

The Net Zero Asset Managers Initiative is an opportunity for the investment community to stand alongside the companies we are engaging with and demonstrate that we are serious about the transition to a net zero economy. As a group, we have much more agency to drive change in companies seeking investment as well as put pressure on governments to increase their climate ambition. 

We would call on all investors to join the initiative and set science-based targets that align to net zero. From this position we can push companies harder when it comes to investment and accelerate the path to a healthier, safer net zero world.