A Thrilling Conclusion to the IPCC's Climate Science Masterpiece

Recently the UN IPCC released a report mapping out a path towards overcoming climate change. For investors, the latest report represents a scientifically proven pathway to investment opportunities that lead to climate mitigation.

Key Takeaways

• The timeframe is very short to invest sufficiently across all sectors to reach a 1.5°C scenario, by reducing emissions and removing carbon from the atmosphere
• Though improbable, the most ambitious climate targets are still doable both technologically and financially
• Climate mitigation and climate adaptation luckily seem to be mutually reinforcing

Latest Report

The third and last part of the Sixth Assessment Report, "Mitigation of Climate Change", was published on April 4th 2022 by the Working Group III of the IPCC. The report provides an assessment of how various technologies combined with human behaviour, choices and consumption can contribute to cut or end emissions in key sectors. While these are documented in the report's 63-page summary, it should be noted that the release of the report was delayed partly due to, scientists concern that the summary did not provide a balanced representation of the detailed research and findings of the full report.

This piece will present a brief summary of the findings, some more in-depth takeaways, followed by action measures for climate mitigation, before looking at investment implications. Finishing off, we will point out some relevant strategies from team Solutions in Storebrand Asset Management.

Warning: Much like the gargantuan report of scarcely 3000 pages, this summary in itself is long. It is possible to skip the in-depth takeaways given the probability of being overwhelmed, and come back to it at a later point.

Summary of Findings

Key takeaways from the report are¹:

1. The solutions, technologies and policies required to address climate change already exist. However, the barriers blocking progress are corporate and political power structures, fossil fuel interests and human behaviour
2. The "Summary for Policymakers" approval process was historically demanding. The technical research in the report is fully controlled by scientists, whereas the summary must be approved by government by the 195 UN member countries. Allegedly, disagreements linked to the role of technology versus human behaviour, carbon capture and storage and the end of fossil fuel production caused a notable delayed launch
3. The report consists of five parts: 1) Introduction and frameworks; 2) Emissions trends, drivers and pathways; 3) Seven sectors (energy, agriculture/forestry/land, urban systems, buildings, transport industry and cross sectoral perspectives); 4) Institutional national, sub-national and international, financial and technological drivers; and 5) Accelerating the transition in the context of sustainable development
4. Global carbon emissions must peak within three years, by 2025, to reach the 1.5°C target and net zero emissions by 2050
5. The co-benefits of climate mitigation is heavily emphasised. Addressing the challenges of the climate crisis by transitioning to low-emission energy, safeguarding nature and decarbonising transport and buildings tends to also improve energy security, public health, justice and solve social concerns. Transitioning to low-emission energy systems tends to improve air quality and public health
6. The pace of climate mitigation is too slow, action is needed immediately. "Studies evaluating up to 105 updated NDCs submitted by October 2021 indicate that emissions in 24 conditional NDCs have been reduced by 4.5 Gt CO2-equivalents, but only closes the emission gaps by about one-third to 2°C and about 20% to 1.5°C compared to the original NDCs submitted in 2015/16. Given the gaps, there is a need to explore accelerated mitigation (relative to NDCs and current policies)" (page 598)
7. Limiting likely warming to 2°C or below will result in stranded assets. There are two types of stranded assets: "fossil-fuel resources that cannot be burned and premature retirement of fossil infrastructure (e.g., power plants). About 30% of oil, 50% of gas, and 80% of coal reserves will remain unburnable if likely warming is limited to 2°C" (p 1059)
8. Dramatic changes will need to be made in the use of natural resources, diets, lifestyles, energy production, industry, transport and consumption to reduce emissions across the board
9. A few key sectors will be major contributors to reach net zero emissions. These are emission reductions in buildings, industry, transport, energy supply and land use, land use change and forestry
10. The net zero emission society is possible, both technologically and financially. Illustrative Mitigation Emissions Pathways (IMPs) in the report showcase exactly how
11. Carbon removal and storage of CO2 in nature is central, including reforestation and halting deforestation. Direct air capture and storage of carbon holds increasing optimism
12. Human behaviour will tip the scale. Changes in culture and habits can "magically" remove 40 percent to 70 percent of emissions compared with today's trends. Key changes include less beef consumption, air travel and lower energy use in buildings. System change starts with cultural change and lifestyles based on higher life quality with less resource consumption
13. Systemic solutions to integrate large shares of renewables in the energy system are now commercially viable. Examples are to coordinate energy systems, "coupling sectors, energy storage, smart grids, demand side management, sustainable biofuels, electrolytic hydrogen and derivatives"
14. Industrial net zero CO2 emissions is challenging but possible. Industry emission cuts will require "coordinated action throughout value chains to promote all mitigation options, including demand management, energy and materials efficiency, circular material flows, as well as abatement technologies and transformational changes in production processes"
15. Sectors like aviation and shipping seem unlikely to be fully electrified soon, so there will be a need to include sustainable fuels like hydrogen or biofuels
16. Green quantitative easing is a novel suggestion from the IPCC for central banks to consider. The investment gaps to finance climate mitigation can be closed using the global financial system. However, there are obstacles to allocate sufficient capital to climate action, both inside and outside the financial markets (p 668)
17. Well managed digital technologies contribute to decarbonisation due to their "ability to increase energy and material efficiency, make transport and building systems less wasteful, and improve the access to services for consumers and citizens" (p 196)

In-depth Takeaways

Slightly more extensive findings from the report are the following²:

1. Net zero energy systems lead to drastically reduced fossil fuel use, carbon capture and storage in the remaining fossil based systems, conservation of energy and efficiency, widespread electrification and the use of energy carriers like sustainable biofuels and green hydrogen
2. The unit costs of solar energy, wind power and lithium-ion batteries have fallen by 85 percent, 55 percent and 85 percent respectively since 2010 and 2019. Hence the renewable technologies are widely cheaper than fossil fuels for electricity production, accelerating the rapid adoption rates worldwide.
3. The 1.5 degree scenario with no or limited overshoot requires that the global use of coal, oil and gas in 2050 will decline by 95 percent, 60 percent and 45 percent respectively compared to 2019 levels
4. Finance is a critical enabler for the low carbon transition. Well directed finance flows can help to reduce net GHG emissions and enhance climate resilience. "Fundamental inequities in access to finance as well as finance terms and conditions, and countries’ exposure to physical impacts of climate change overall, result in a worsening outlook for a global just transition" (p 186). Innovative financing methods could help reduce a systemic under-pricing of climate risk in markets and increase investments that align with the Paris Agreement goals. Equity can be an important enabler to accelerate mitigation and increase levels of ambition. Financial flows for climate adaptation and mitigation increased by 60 percent between 2013 and 2020, but has slowed down since 2018
5. The IPCC report for the first time features a chapter on demand, services, and social aspects of mitigation, linking it to behaviour and lifestyle change. Focus on the demand side "broadens the climate solution space beyond technological switches confined to the supply side, to include solutions that maintain or improve well-being related to nutrition, shelter and mobility while (sometimes radically) reducing energy and material input levels, with high and/or improved quality of life, improved levels of happiness and sustainable human development" (p 760)
6. For the decarbonisation of industry, energy efficiency, material efficiency, recycling, fuel switching and carbon capture with utilisation will contribute significantly. Other sectors include reduced greenhouse gas emissions from fluorinated gas and methane from solid waste and wastewater
7. It will be challenging to make energy systems 100 percent renewable. Variable renewable electricity may be balanced by batteries, hydrogen and other storage methods, but also smart transmission, advanced controls and demand-side responses that even out peak load to the grid
8. Cities gives an opportunity to increase resource efficiency and decarbonise at scale, enabled by the concentration of people and activities. However, urban land areas can triple between 2015 and 2050, meaning new carbon emissions will be locked in. Urban green and blue infrastructure like trees, urban forests, permeable surfaces and green roofs can mitigate climate change through carbon sinks, avoided emissions, and reduced energy use. It will also offer co-benefits like reducing the urban heat island effect, heat stress, reducing stormwater flooding, improving air quality, and improving the mental and physical health of urban inhabitants
9. Transport modes need to be electrified. "Battery-electric vehicles (BEVs) have lower life cycle greenhouse gas emissions than internal combustion engine vehicles (ICEVs) when BEVs are charged with low carbon electricity. Electromobility is being rapidly implemented in micro-mobility (e-autorickshaws, e-scooters, e-bikes), in transit systems, especially buses, and to a lesser degree, in personal vehicles." (p 131) As a result, cities worldwide are expected to become increasingly walkable and bikeable
10. Circular economy is "highlighted as an increasingly important mitigation approach that can help deliver human well-being by minimising waste of energy and resources. While definitions of circular economy vary, its essence is to shift away from linear “make and dispose” economic models to those that emphasise product longevity, reuse, refurbishment, recycling, and material efficiency, thereby enabling more circular material systems that reduce embodied energy and emissions" (p 106). Emissions reductions mainly come from reduced primary material production and transport
11. Digital technologies can enable climate mitigation and achieve several Sustainable Development Goals. Sensors, robotics, Internet of Things and artificial intelligence can "improve energy management in all sectors, increase energy efficiency, and promote the adoption of many low-emission technologies, including decentralised renewable energy, while creating economic opportunities" (p 14). Upsides must be balanced to counter negative trade-offs due to increased demand for goods and services
     

Actions to accelerate climate mitigation

(p 601)

With the findings from the report in mind, these are the key action that the climate scientists regard as critical to ensure large scale global climate mitigation:

1. Decarbonising electricity supply to produce net zero CO2, including renewable energy
2. Radically more efficient use of energy than today
3. Electrification of end-uses including transport
4. Dramatically lower use of fossil fuels than today
5. Converting other uses to low- or zero-carbon fuels (e.g., hydrogen, bioenergy, ammonia) in hard-to-decarbonise sectors
6. Promote bioenergy, demand reduction, dietary changes, and policies, incentives, and rules for mitigation in the land sector
7. Setting and meeting ambitious targets to reduce methane and other short-lived greenhouse gases

Investment Implications

The report documents the urgent need for climate change mitigation, and feasible paths to the 1.5°C target, which in turn points to potential investment opportunities in filling this gap. Though the science which is condensed in the report is well known, the narrative is clear that we can still avoid the worst climate change effects, at negligible macroeconomic costs compared to climate paralysis. In fact, the global economic interests of climate action far outweigh inaction.

Notably, the report underlines that a great deal of the necessary adaptations are not necessarily based in technology. Acknowledging the fact that humans at scale make choices based on their life situation, including economic viability, convenient access to services, shortest travel distance and time saving appliances – makes the case for efficient climate solutions to be human-centered, not technology-centered.

However, these changes also involve a more rapid transition to a low emissions society, which the report also notes could be turbulent, given that our societies and economies are currently heavily linked to the "old model" of a fossil-based economy. There is a need to balance investments for a rapid transition to a low emission society, with the need to ensure the stability of our global economy.

This is an implicit paradox: phasing out the of a fossil-based economy and transitioning to a renewable and circular economy could provide multiple co-benefits to human health, longevity, natural restoration and equal wealth distribution. However, a rapid phase-out of fossils could lead to political and economic destabilization. The danger of "greenwashing" lurks in the shadows, potentially confusing investors and harming the development of sustainable finance.

Areas that will need significantly increased investments are renewable energy technologies, energy storage, flexible electricity distribution, energy efficiency, electrification in transport, buildings and industry, nature-based solutions, plant-based food, sustainable forestry and agriculture, low- or zero-carbon fuels (e.g., hydrogen, bioenergy, ammonia) in hard-to-decarbonise sectors, solutions that lower fossil fuel use, as well as the "hard to avoid" carbon capture and storage.

What could be a viable path forward? Stable growth outlooks may arise in the intersection of solutions that are inherently designed to be renewable, circular and practical, without causing significant harm to nature or people.
 

Relevant Strategy from Storebrand's Team Solutions

Our flagship solutions fund, Storebrand Global Solutions, has exposure to companies within the solution themes "renewable energy", "equal opportunities", "smart cities" and "circular economy". A recent addition to the latter theme is a cluster of companies within metal and battery recycling: Aurubis and Sims Metal Management. The report's reference to sustainable options for demand management, materials efficiency, and circular material flows that can contribute to reduced emissions is a tentative indication that this was an exciting investment decision.

Within electrification, Schneider Electric is a company to be highlighted. The French pioneer is a holding in both the fund Storebrand Global Solutions and the fund Storebrand Smart Cities. The fund Storebrand Smart Cities is also invested in the urban planning theme, for example through the sustainable infrastructure provider Acciona and the Dutch engineering firm Arcadis, which delivers urban climate adaptation and mitigation solutions. Electric bus producer BYD, Piaggio which delivers electric scooters, and Giant Manufacturing that produces both electric and regular bikes are great examples of stocks that give exposure to low emission transport.

When it comes to renewable energy and energy storage, Storebrand Renewable Energy is a fund with pure exposure to the solution theme. A solution company found in the fund that has been an early mover within wind energy is the Danish company Vestas Wind Systems. Within solar energy, the German renewables producer Encavis is a great example, while smart grids and storage is represented by an American firm called SolarEdge.

Last, but not least, the report emphasizes the need for a just transition and enabling access to basic services. Our fund Storebrand Equal Opportunities addresses access to digital, financial and health services, which enables a just transition which addresses the social side of sustainability and a unique equality aspect of societal development. Solution companies that enable digital access are America Movil, American Tower Corporation and Millicom International Cellular. Within health are examples like Royal Philips, Cooper Companies and Siemens Healthineers.
 

The Future of Climate Action

Moving back up to the bigger picture, the future is built by action taken today. Every single person on planet earth is responsible to act as a global citizen. The UN Sustainable Development Goals sets the pathway, and climate goals are committing for nations and cities. You and I can contribute to societal development by voting, pursuing knowledge, and setting our capital to work to accelerate the transition to a low emission and equitable society. The IPCC research can inspire both nations, companies, and citizens on where to allocate capital to maximise impact. Since failure is not an option, global collaboration for climate action must continue with unwavering force.

For more context, the previous IPCC report laid the groundwork for this report by detailing the impacts of climate change. Please read our analysis of the previous chapter of the IPCC report.
 

²IPCC, 2022: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [P.R. Shukla, J. Skea, R. Slade, A. Al Khourdajie, R. van Diemen, D. McCollum, M. Pathak, S. Some, P. Vyas, R. Fradera, M. Belkacemi, A. Hasija, G. Lisboa, S. Luz, J. Malley, (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA. doi: 10.1017/9781009157926