Adaptation is often the “forgotten topic” of climate finance, or put in the ‘too hard’ basket when it does make it on the agenda, but asset managers have been encouraged the latest Intergovernmental Panel on Climate Change (IPCC) report could bring real progress on climate adaptation this year.
WGII – Impacts, Adaptation and Vulnerability, published on Monday, was the IPCC’s first report on the impact of climate change in eight years and it follows the report of the “physical science basis” working group last summer.
This latest paper provided provided more scientific evidence on adaptation and deep insight into the capacities and limits of the natural world and human societies to adapt to climate change.
“At COP26, adaptation was quite the forgotten topic – there weren’t as many developments as we would have hoped,” reflected ING junior economist, Samuel Abettan.
“With [the IPCC] report now, it gives some scientific evidence and basis for further discussion next November in Egypt. I would predict that at COP27 [this] is going to be at the top of the agenda, at least in terms of this adaptation finance question and how to get the private sectors to work towards that,” he continued.
Abettan also pointed to the gap in global climate finance highlighting developed countries have failed so far in providing the $100bn of climate finance they previously pledged to developing countries. Meanwhile, world leaders at COP26 agreed to double adaptation finance to at least $40bn by 2025.
Now, he said, there are questions about “how the private sector is going to react to this… urgency towards adaptation finance”, and also warned incentivising the flow of capital will not be as easy as it could be with mitigation, which can make use of carbon markets.
Climate-resilient development
Chris Dodwell, head of policy & advocacy at Impax, described the doubling of finance committed to climate adaptation as a “drop in the ocean” compared to the private capital available to address the issues.
However, he was encouraged by the IPCC laying out the science behind the scale and extent of the impacts of climate change – both those already being felt and those we are able to predict.
“I think [this] will help create interest in those [adaptation] opportunities, but also make them more visible,” said Dodwell.
The “most welcome surprise” he found in the report, however, was the scientists “putting this wrapper around all of this in the concept of ‘climate-resilient development’… with nature at its heart.”
He said it was makes good logical sense and commented: “I think it would be very encouraging to see mainstream investors starting to operate in that way.”
Just transition
Murray Birt, senior ESG strategist at DWS, said measuring climate resilience properly will be crucial to a just transition, but such metrics have been elusive as physical risk has not been high enough on the agenda.
“Part of the reason… was that [physical climate risk] wasn’t included directly within the Task Force on Climate-related Financial Disclosures (TCFD) framework originally when TCFD came out,” said Birt.
He explained the European Bank for Reconstruction and Development has since provided some recommendations so TCFD could be extended to include physical climate risk.
“[There were] some recommendations corporates should be disclosing their one- and 100-year value-at-risk from disasters. These are metrics the insurance sector regularly uses and we need to have corporates starting to disclose their value at risk. And I don’t think we’re there yet.”
Birt was encouraged by the IPCC’s report and expressed some hope for getting the correct measures for resilience, but said it will take time: “It’s only now that that Climate Action 100+ initiative, and World Benchmarking Alliance are publishing some metrics on the just transition on the mitigation side.
“So it’ll be a bit of time still before we actually have the metrics we should be evaluating companies on for just transition on climate resilience.”
Warnings
As well as being useful for the challenging area of adaptation finace, the IPCC’s latest paper is an alarming read on many fronts. Stephanie Pfeifer, CEO of Institutional Investors Group on Climate Change (IIGCC) said investors should read the report as a warning they could be missing vital data on risk.
“For investors not already making their expectations on physical climate risks clear to companies, as set out by IIGCC and supported by investors representing $10trn in collective assets in November 2021, [the report] serves as a warning. Without this detail and transparency, investors cannot establish a true picture of their investment portfolio risk,” said Pfeifer.
She also urged investors to “urgently” hold companies accountable where they are contributing to the effects of climate change, particularly relating to fossil fuel industries.
“Specifically, investors working through Climate Action 100+ must accelerate engagement and seek net zero aligned transition plans immediately. This must be backed up by a particular focus on implementation and evidence of progress,” she said.
Kristina Church, head of responsible strategy at BNY Mellon Investment Management likewise noted the urgency required and added that the immediate action is required at a scale not seen before: “We need to take action this decade, to ensure both planetary health and human wellbeing.
“The lack of financing is holding back both climate mitigation and the infrastructure needed for climate adaptation.
“One of the key themes in the report is the urgent need for global cooperation, and addressing the climate challenge requires a transition on an unprecedented scale and cooperation across all sectors of society.”
The Responsibility Team at Federated Hermes noted the time-sensitive nature of adaptation costs.
“The IPCC report underscores the urgency of immediate and more ambitious action, and greater investment in adaptation, which we hope will finally be addressed in the lead-up to COP27 as the window of opportunity rapidly closes and adaptation becomes increasingly costly and more difficult,” the team wrote in a statement.
Difficult questions
Meanwhile, Sophie Lawrence, senior ethical, sustainable and impact researcher at Rathbone Greenbank Investments explained what the IPCC’s findings mean for how asset managers engage with companies: “The investment community needs to step up and be bolder in what we ask of companies when we engage with them, as well as investing in the products and services that play a positive role in climate mitigation and adaptation. We now have tools such as the IIGCC’s net zero investment framework at our fingertips, to credibly align our portfolios to a 1.5°C world.
“We need to be ambitious in how we engage with companies – looking beyond climate disclosure and target-setting to ask the more difficult questions around capital allocation, climate lobbying and just transition strategies.”
