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Image credit: USS
Research finds increased focus on short-term factors crucial to meeting net zero emissions.
A "paradigm shift" is required in the climate scenarios used by investors, businesses and governments to combat climate change, according to a report published by the Universities Superannuation Scheme (USS) and the University of Exeter.
The report, No Time To Lose - New Scenario Narratives for Action on Climate Change, released just last week, has sent shockwaves through the climate change discourse. It boldly asserts that the prevailing climate scenarios employed by investors worldwide exhibit 'significant limitations' in their battle against climate change, particularly in their pursuit of net-zero emissions by 2050.
The report backs up research from the Institute and Faculty of Actuaries and the University of Exeter earlier this summer, which revealed climate scenarios in financial services "significantly underestimate risk".
What's at the heart of the issue? The report argues that current climate scenarios predominantly focus on long-term transitions that span decades – a strategy it deems unrealistic and overly dismissive of the immediate, shorter-term geopolitical risks and financial market volatilities. These short-term factors, the report contends, have a substantial impact on the implementation of measures aimed at achieving the ambitious net-zero target by 2050.
One glaring truth emerges: to even come close to the net-zero goals, global emissions must be halved by 2030. This startling revelation underscores the need for a drastic shift in how investors approach climate scenarios. It's no longer just about the distant future; it's about grappling with the challenges and risks that loom on the short-term horizon. These include global politics, financial market fluctuations, and the ever-increasing frequency of extreme weather events.
The report outlines four prospective climate scenarios up to 2030, each meticulously designed to sharpen the focus on immediate risks and opportunities that will sway investment decisions over the near and medium term. These scenarios were crafted in collaboration with over 40 experts spanning geopolitics, climate policy, economics, finance, technology, and consumer behaviour.
USS Investment Management (USSIM) chief executive Simon Pilcher said: "This new report provides the foundations for a broad-ranging debate among investors, policymakers and academic experts on developing this practical approach to climate scenario analysis, intending to embed it into transition planning and financial decision-making. We hope this work represents the beginning of a much-needed shift in climate-related strategic decision-making both within the investment industry and potentially beyond, which is a cause for cautious optimism."
USSIM head of investment strategy and advice Mirko Cardinale said the research undertaken with the University of Exeter has been "extremely invaluable" in developing a new approach to climate scenario analysis.
"We aim to lead in the development of this new approach that is less focused on precise estimation and more on understanding how real-world dynamics could play out in a complex world where climate risks cannot be looked at in isolation from political, economic, and technological factors. Moving forward, we intend to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top-down portfolio construction, and country/sector preferences."
University of Exeter visiting fellow and lead author of the report, Mark Cliffe, commented: "Many organisations, not least in the investment community, are committed to playing their part in halving global greenhouse emissions by the end of the decade. It is disturbing that only in the most optimistic of our four scenarios does this look to be plausible."
Global Association of Risk Professionals Risk Institute president Jo Paisley added: "We are already witnessing devastating physical impacts from a warming planet, which are only going to intensify over coming decades. Add transition risks to the mix, and the resulting risk landscape will be increasingly difficult to navigate.
"But given the significant uncertainties, we urgently need to consider a variety of scenario narratives. As this timely and thought-provoking paper makes clear, there is no time to lose."