Are we there yet?
In 2024 the world spent a full 12 months above the 1.5°C warming threshold, in 2023 we spent close to a third of the year above 1.5°C. While technically not a breach of the long-term commitments made as part of the Paris Agreement, it does move the world closer to this scenario. The Copernicus Global Climate Highlights 2024[i] Report notes that, not only was 2024 the warmest year on record, the last 10 years are the warmest 10 years on record. If we continue at current rates of warming (more than 0.2°C per decade) it is highly likely we will breach the 1.5°C Paris target as early as 2030.
While El Nino likely played a part, scientists say human-induced climate change was the main driver of the extremes seen in 2024[ii].
Tipping points – the “known unknowns.”
Advancements in detection and attribution modelling have enhanced our understanding of the direct links between weather events and climate change. Emerging evidence may point to a closer proximity to triggering five major earth system tipping points. Some scientists are urging more than ever for transformational change[iii]. These significant tipping points, and their impacts, are often overlooked in country and financial climate assessment models.
Once tipping points are breached, some scientists suggest they may be irreversible and could be catastrophic. There are some early warning signs[iv] that suggest some of these earth systems are getting closer to their tipping points, although a large amount of uncertainty remains. Scientists are focusing on research into reducing uncertainties and assessing tipping point interactions.
If we breach these tipping points, it may have significant consequences for our food systems, land availability and ability to adapt to the impacts of larger storms, significant flooding and intense heat.
Navigating the uncertainty
We are witnessing many impacts of climate change. It seems to the casual observer that we may be experiencing an increasing number of climate-related disasters. How do we navigate through this uncertainty and adapt to the physical and transitionary risks of escalating global warming?
Living in a 1.5°C+ world where impacts may not be fully felt for decades poses challenges for investors. A breakdown in key earth systems may have regional and global impacts, such as the collapse of the Atlantic Meridional Overturning Circulation (AMOC)[v]. The impact this could have on existing food systems and the global climate may directly impact food security and communities. The potential for economic, social and political disruption as a result of climate system failures only adds to these challenges.
With countries and companies retracting or softening their commitments to reduce emissions around the world, we could see a slowdown in emission reductions. This has the potential for abrupt and painful changes in regulations and government policies in future years as progress on the climate transition will need to intensify.
Supporting the allocation of investments towards companies who address climate challenges may advocate for the need to urgently reduce carbon emissions. It may also continue to make good investment sense reflecting available displacement technologies. How should we manage unmaterialised risks when they could have significant implications on returns?
Understanding the exposure of an investment portfolio to the physical and transition risks of climate change is the first step. This could include an assessment of a company’s supply chains as well as the adaptation measures they have in place.
This can include in-house climate research as part of an overall approach to integrate ESG into investment decisions. Risks arising from each company’s operations and the company’s value chain should be considered. This can be complimented with quantitative and qualitative portfolio level assessments allowing investors to drill down into what specific risks (physical or transition), geographies and sectors they may be exposed to.
Climate scenarios are a valuable tool for shaping investment strategy; this doesn’t need to be a laser focus on reducing emissions, the agility and adaptability of investment portfolios is increasingly important regardless of the climate.
How quickly can your investment portfolio divert from risk and take advantage of opportunities relating to climate impacts? Monitoring signals derived from climate scenarios or key emerging risks should be a feature of portfolio climate risk management. An investment strategy that is agile and adaptable allows you to respond to the signals when required.
[ii] Copernicus: 2024 is the first year to exceed 1.5°C above pre-industrial level
[iii] Climate report warns of escalating crisis, urges immediate action as UN summit nears | ScienceDaily
[iv] Earth on verge of five catastrophic climate tipping points, scientists warn | Environment | The Guardian. The utterly plausible case that climate change makes London much colder.
[v]What would happen if the Atlantic Meridional Overturning Circulation (AMOC) collapses? How likely is it? | MIT Climate Portal
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This publication is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.
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