IPCC 'code red' report no surprise for institutional investors

Last week, the UN released a report on climate change that shocked many people, but institutional investors who have been integrating ESG in their portfolio were not among them.
IPCC 'code red' report no surprise for institutional investors

A United Nations (UN) report on climate change made headlines last week for stating that humanity was in a “code red” situation with climate change. But for institutional investors, the report was no surprise at all, and merely reiterated the need for strong investor action.

The UN’s Intergovernmental Panel on Climate Change (IPCC) released the first part of its sixth assessment report last Monday (August 9) detailing the irreversible effects global warming will have on the planet and confirming that human activity has had an impact on climate change.

In Asia, for instance, surface and marine temperatures are expected to continue to increase, and fire weather seasons will likely lengthen and intensify, particularly in North Asia. Sea levels in Asia have increased at a faster rate than the global average and monsoon rains are expected to increase.

The report also found that emissions of greenhouse gases from human activities were responsible for 1.1 degrees Celsius of global warming since the 19th century, and that human actions will have potential to limit further warming.

Rebecca Mikula-Wright,

“The IPCC report did not come as a shock – the findings are not only consistent with the decades of scientific warning about the warming climate, but they are even clearer and more granular than they have been before, so they provide a stark warning that must catalyse accelerated action,” Rebecca Mikula-Wright, chief executive of the Asia Investor Group on Climate Change (AIGCC) told AsianInvestor.

“This report should highlight to investors the mounting risks and costs of inaction and the need to reassess if their current investment policies and strategies are in line with what the science requires, and what their own governments have signed up to. No responsible government, company or investor should ignore these findings,” she added.

Granted, asset owners and fund managers have been integrating environmental, social and governance (ESG) principles into their investment strategies, but experts generally agree that current goals and strategies are not enough to limit the effects of climate change.

“I think what's so critical is the facts about climate change have been known for a long time. But a report like this raises awareness again, and we need these data points, so we can drive that urgency. And part of that, actually, from history, is appropriate policy settings from government,” Debby Blakey, chief executive at Hesta super fund said at the Better Futures Forum on Tuesday (August 17).

“If you think of the strength of our superannuation system, there is more than $3 trillion in savings that can be invested in ways to support the shift to a low carbon economy. And I think we must never lose sight of that,” she said.


Decades of research and science have prompted investors to action such as net-zero pledges, Paris Agreement alignment, and climate scenario testing, which are all positive but insufficient steps to mitigate climate change, the experts agreed.

“Many investors have started testing their portfolios against climate scenarios of 1.5 and two degrees Celsius of warming as well as the over three degrees Celsius scenario that we are currently on track for, and many conclude that portfolios will perform better in a 1.5 degrees Celsius world,” Mikula-Wright said.

“However, we need to see implementation and action to 2030, to ensure any longer-term net-zero targets will be met with confidence. For many other investors in the region, there is a lot of catching up to do where ESG strategies do not include addressing the full suite of risks and opportunities of climate change that are with us now,” she said.

Andy Howard, Schroders

“Without action to cut emissions in coming decades, temperatures will rise by up to four degrees Celsius over that historical baseline before the end of the 20th century,” Andy Howard, global head of sustainable investment at Schroders told AsianInvestor.

“While the difference between 1.5 and four degrees Celsius might sound minor, the human consequences are not. A 1.5 degrees Celsius, temperature rise will lead to 2.4 times more frequent droughts and 1.5 times increase in extreme precipitation. At four degrees Celsius, those risks roughly double to 5.1 times and 2.8 times higher frequencies, at which point many parts of the world will become uninhabitable, mass migration becomes unavoidable and the economic impacts will be severe,” he said.


The good news is that the report found there still are steps humans can take to limit the effects of climate change.

“The IPCC thinks that human actions still have the potential to determine the future course of climate, and reaffirms that the evidence is clear that carbon dioxide is the main driver of climate change,” Jean-Pierre Dmirdjian, senior sustainability analyst for energy at Mirova said.

“At the current rate of emissions, the carbon budget compatible with a 1.5 degrees Celsius warming will be exhausted within approximately 9.5 years, which underpins the need for cutting carbon dioxide emissions significantly and without delay.”

The sustainability-focused investment manager works to reduce its carbon footprint and engage with companies to meet its net-zero goals.

This involved jointly developing a methodology with French consulting firm Carbone 4 to measure firms’ direct and “induced” greenhouse gas emissions produced through their activities and those of suppliers.

“Ultimately, this method helps us to determine the carbon footprint and impact on global average increase of temperature of our portfolios of investments in listed equities and fixed income, with a view to reaching a level compatible with the target set by the international community, i.e. to limit global warming to below 2 degrees Celsius,” he said.


Government policies and a lack of standardisations are among the oft-cited challenges by institutional investors.

Gabriel Wilson-Otto
Fidelity International

“Some of the biggest challenges the investment industry faces when attempting to implement ambitious climate change initiatives include a lack of detailed data sets, translating climate scenarios to company specific impacts, policy certainty (including pricing of carbon), specialist internal capabilities, and concerns around the near-term impact on fund performance,” Gabriel Wilson-Otto, director of sustainable investing at Fidelity International told AsianInvestor.

Mikula-Wright from AIGCC agreed, but said that the situation has improved in the past year.

“One of the biggest issues that investors face is a lack of policy frameworks that encourage private investment in these solutions, particularly in Asia. Investors require certainty around the expectations they need to meet to achieve net-zero targets by 2050,” she said.

“On the positive side, we can already see significant shifts in climate change policies in some Asian countries in the last 12 months. While many governments in rich countries have been slow in responding to the climate crisis, a few Asian governments, namely Korea, Japan, and China, have shifted from being laggards to leaders in their approach to climate action.”

At Schroders, Howard hopes that the IPCC warning may provide a catalyst for governments to “coordinate ambitious and comprehensive action to reach net-zero emissions by the middle of the century.”

“Reaching that goal will require halving global emissions over the next decade, or 6-7% annual reductions… While possible, that scenario is highly optimistic unless significantly more aggressive steps are taken, including from asset managers and institutional investors who must do more to hold companies to account,” he said.

Howard also believes that ESG strategies will evolve to meet the demands posed by climate change. “We are defining the path we will take to get there and ensuring we are as equipped as possible to manage the risks and seize the opportunities facing the investments we manage,” he said.

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