Investment Implications from UN IPCC’s Report

A recent flagship UN IPCC report on climate change rings alarming bells for governments and urges for actions. We discuss with Alexander Chan on this influential report on the key implications and associated investment opportunities. 

1) What is the significance of the UN IPCC report? 

• The UN’s Intergovernmental Panel on Climate Change (IPCC) released Working Group 3 report of its Sixth Assessment Report on April 4th focusing on climate change mitigation. 
• This report is a culmination of research from over 200 scientists  reviewing over 18,000 scientific papers¹.
• IPCC concluded that we are unlikely to limit warming to 1.5 to 2 degrees without stronger climate action; a rise of more than 3 degrees is expected instead. 
• The report lays out options for industry and governments, including the adoption of technologies and shift in consumer demand with the aim of decarbonization that could create potential opportunities and implications for investors. 

• Reduce fossil fuel: Removal of fossil fuel subsidies and phasing out of unbated coal including planned coal infrastructure. In our recent analysis, shifting from commodity dependent sources to renewables also help governments to develop greater energy security in the longer term, especially in light of recent geopolitical events. 
• Global disparities and just transition: The report highlights emission disparity between high and low income per capita countries. Similar to COP26, it emphasizes importance of climate finance that developed countries could consider to facilitate just transition for developing countries.  
• Sustainable cities: Urban areas contribute to more than 2/3 of global emissions. This presents opportunities in resource efficiency and sustainable urban policies.²  
• Demand-driven approaches: Demand-side strategies that can reduce emissions by 40-70% include consumer-led lifestyle behaviorial changes (such as in diets, food and transportation) and energy demand reduction through buildings (e.g. zero-carbon buildings). 

• Energy: Energy companies would need to invest green capex to scale low-carbon technologies.  
• Renewables growth: A significant decline in costs of renewables including up to 85% reduction in solar and battery costs since 2010 has helped to accelerate renewables penetration.³
• Transport: Continued investments in electrification of transport, alternative fuel sources (biofuels, hydrogen) especially for aviation and shipping. 
• Materials and industrials: Greater material efficiency including minimizing waste and increasing recycling rates; especially applicable to sectors like steel, chemicals, cement.⁴
• Ecosystem restoration: Reduced deforestation and restoration of forests critical to sequester and remove carbon especially in tropical areas with higher sequestration density.
• Carbon Dioxide Removal (CDR): This is unavoidable in the path to net zero with both engineered and nature-based solutions.⁵ 

• APAC as a region has the largest share of global emissions and yet is also most vulnerable to the impacts of climate change. Over 50 million people in the region were affected by climate disasters in 2021 alone.⁶  
• APAC policy makers will have to build out a decarbonization roadmap.
• China: Continued progress including 1+N carbon framework, joint declaration on decarbonization with US or pledges to stop building coal power plants overseas. With majority of the Chinese economy still reliant on coal, continued scaling up of renewables, expanding on emissions trading scheme and regulatory development will all play important roles. 
• India: Coming out of COP26, 2070 net zero target along with other 2030 commitments (including raising non-fossil fuel energy share and carbon intensity / emissions reduction targets) are steps in right direction. 
• Southeast Asia: Climate financing alongside continued development of sustainable market (such as regional standards like ASEAN Taxonomy) are important parts of the puzzle. 
• Climate Technologies vs Climate Transition Leaders: Renewables (including solar, wind technologies), electric vehicles and electrification, energy storage. At the same time there are opportunities to invest in climate transition leaders in heavy-emitting sectors who have made substantial progress to decarbonize.
• Asset Class: From equities, fixed income, ETFs to real estate, wide spectrum of approaches also signify ability to customize to investment preferences. 
• Geography: Decarbonization across the globe will create differing regional progress and policies. In particular, policies with global connectivity like EU’s Cross-Border Adjustment Mechanism or interdependency of energy supply chains would be key considerations.