Climate Report Is a Call to Action | Lord Abbett

 

Insight • August 23, 2021

Climate Report Is a Call to Action

The landmark climate report by the IPCC provides a fresh impetus to examine the likely economic costs of a warming planet.


by Emanuela Scura  Partner, Head of ESG Investment

Read time: 2 minutes

The Intergovernmental Panel on Climate Change (lPCC) recently released its sixth assessment of the state of scientific evidence on climate change. Since the first IPCC report was released in 1990, each new edition has become a catalyst for worldwide discussion of the future of climate change and of possible policies and institutions to address the associated problems. Specifically, the August 2021 report provides detailed, scientific evidence of the accelerating impact of climate change on inhabited regions across the globe and of the human influence on the climate system.

The IPCC report increases pressure throughout the world for collective ownership of the issues surrounding climate change.

Assessing the Climate Challenge

The report is timely, as accounting for and reporting of carbon emissions has sparked a wide-ranging debate among regulators, companies, climate experts, and market players. Reflecting the growing sense of urgency, the SEC is expected to release proposed rules for mandatory climate-risk disclosure by companies by the end of 2021.

The report that was just released is what is known as the “Summary for Policy Makers” of the first working group that focuses on climate science. The IPCC will then produce the assessment reports of its three working groups next year. The second and third working groups will provide special reports focused on climate adaptation and mitigation. These assessment reports are not prescriptive. However, conclusions from these reports are likely to inform behavior by market actors, as the world is catching up with the “unequivocal impact of humans’ influence on climate change,” in the now-famous words of the August 2021 report.

Compared to the IPCC report published in 2018-2019 (AR5), the most recent assessment shows an increased degree of certainty around the human impact on the climate system. “Evidence of observed changes in extremes such as heat waves, heavy precipitation, droughts, and tropical cyclones and, in particular, their attribution to human influence, has strengthened since AR5.” This impact seems to be accelerating. As an example, “The frequency and intensity of heavy precipitation events have increased since the 1950s, while cold extremes (including cold waves) have become less frequent and less severe.”

What Can Be Done?

It is likely that we will pass the 1.5°C temperature-rise level by 2040—a decade earlier than predicted in the 2018 IPCC report. The accelerated pace of warming points to the need for immediate action. Asset managers can play a key role in driving this action, by mobilizing capital toward those companies that can lay out and execute a well-articulated carbon emission strategy, and by holding management of those companies accountable through proxy voting and engagement practices. We believe active asset managers are well positioned to influence companies’ perspective on environmental, social, and governance (ESG) issues; this position will become increasingly relevant as the world learns more about the impact of climate change.

Wildfires, floods, and similar low-likelihood, but high-impact outcome events are an area of focus in this IPCC report and underscore the relevance of investment expertise around climate-risk exposure and management. These scenarios increase the demand for climate experts and for accurate climate-related data that can feed a framework for risk analysis and can help meet increasingly rigorous regulatory requirements.

Most of the media attention around climate mitigation focuses on the need to reduce carbon emissions.  The IPCC report, however, points to the potential need for an evolving framework on non-CO2 greenhouse gases, most prominently methane, as a reduction in methane emissions would contribute to slowing down the rate of warming and improving air quality, among other benefits. We may therefore see increasing pressure for reducing methane emissions.

Lastly, the report is somewhat cautious on the prospects of carbon capture and sequestration/carbon offsets, as these, while promising for offsetting any residual CO2 emissions, do not replace the need to reduce them. As climate changes, the ability of the ecosystem to sequester carbon gradually declines, which in turn leads to further deterioration in climate. In addition, carbon offsets could have an undesired impact on water and food security.

A Final Word

In light of this report, as investors analyze portfolio companies’ pledges to achieve net-zero emissions, they may increase their scrutiny of the methods that these firms will use to achieve these targets. As such, investors are likely to focus on managements’ ability to evolve corporate business models (such as the use of more advanced technology or supply-chain enhancements) to manage climate risk more effectively, and ultimately, to have a positive impact on climate change. It would be good news indeed if the next IPCC report reflected that the efforts of companies, governments, and individuals have resulted in measurable progress in addressing the global climate threat.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

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The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

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This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

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This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary Definitions

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

“Net zero” refers to the global goal of achieving a balance between the greenhouse gases put into the atmosphere and those taken out. 

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