Net zero for financial institutions - key takeaways from the latest UN report on climate mitigation

(Credit: Photo by Mark Pecar on Unsplash)

Disclaimer: This article reflects South Pole's analysis of the IPCC mitigation report, as well as other referenced sources, and is not a summary of the latter. For exact figures and quotations, refer to the summary for policymakers, the full IPCC mitigation report.

The Intergovernmental Panel on Climate Change's (IPCC)'s
newly released 6th assessment report is a dense digest of the climate solutions that must be put into action to stop runaway climate change. It is also a warning to leaders across sectors of what is to come if we do not change course: global warming could reach the 1.5°C threshold as early as 2030 – and plenty of severe changes will happen well before we hit that mark.

Human activities have already led to record-smashing heat waves in places like Antarctica, which saw extremes of 40°C above normal and a thinning of
ice-shelves; in Canada, where the local population endured deadly spells of 50°C; and in South Africa, where more than a million people have been affected by extreme rainfalls this year. The Australian bushfire crisis that started in 2019 harmed billions of animals and uprooted hundreds of families. The scale and the pace of these climate-related impacts has left little to no time for fragile ecosystems to adapt.

So, what next? Here are the main takeaways that we believe all financial sector leaders should know.

Our behaviour has brought us to where we are today...

Most greenhouse gases (GHGs) come from the combustion of fossil fuels. Their heat-trapping nature has been known since the 19th century, meaning that this crisis could have been avoided. Unfortunately,
2,500 gigatonnes of carbon (GtCO2) were released by human industrialisation, and annual GHG emissions have only continued to climb since then: emissions during 2010-2019 were higher than in any previous decade, and global energy-related carbon emissions rebounded in 2021, after a slight dip as a result of Covid-19.

Why have we not acted sooner? At a citizen level, part of this can be explained by the limited understanding of the scope and scale of the climate crisis. These “
dragons of inaction" also include other cognitive barriers, such as ideological worldviews that may exclude pro-environmental attitudes, which may in turn lead decision-makers to question authorities on climate action.

Organisations have also played a significant role in influencing perceptions and behaviours. So far, corporations – in particular, the
fossil fuel industry – and governments have been accused of misleading the public to protect their own short-term interests. Some of them have already been convicted for doing so. Many financial institutions have also been called out on their climate commitments. This failure to consider long-term survival has a name: the tragedy of the horizon.

Positive climate news, like low-carbon stocks outperforming traditional ones and the rapid uptake of renewable energy, can also add up to a false sense of global progress, especially given the complexity of the climate challenge. While there has been gains – reducing emissions from industrial processes, for instance – these have been overturned by rising emissions from increased energy demand and from transport, agriculture, and buildings, according to the latest
IPCC report.

...but we now “know what to do [and] how to do it."

These were the words of Jim Skead, the co-chair of the latest section of the 6th IPCC report. The challenges that need to be overcome are not small.

(The period of 2010-2019 saw annual emissions of around 55 GtCO2e, higher than in any previous decade. For context, the remaining carbon budget if we are to stay within a scenario of 1.5°C of warming (C1) is around 500 GtCO2e (source: IPCC, 2022).)

We've handpicked what we believe are some of the most critical mitigation measures, broken down by sector, to get to 1.5ºC, as presented in the IPCC report. These are the measures financial institutions should have in mind when divesting and engaging with portfolio companies. Many of the solutions outlined imply a reduction in demand, showing the limits of an approach based solely on technology.

• Energy: To successfully decarbonise the sector, we cannot afford to add any new fossil projects, even projects that might already have been planned. Continuing with the existing fossil infrastructure will overshoot our total 1.5ºC budget by almost 1/3. Increasing renewables share in the energy mix and reducing demand will help to reduce emissions.
• Industry, transport and buildings: Mitigation can be achieved through reduced demand, energy and materials efficiency, circular material flows, and the application of new climate technologies. Concretely, this translates into doing more with less: consuming less, shifting to electric public transport, reducing floor area per capita, and building retrofits. Overall planned urbanisation would also yield benefits.
• Agriculture, forestry, land-use (AFOLU): the AFOLU sector can provide large-scale emission reductions through measures like reforestation, stopping deforestation, reduced use of fertilisers, shifting to plant-based diets, reducing food waste, agroforestry, biochar, composting, and other carbon management techniques. Worldwide, there are hundreds of gigatonnes of manageable carbon locked away in nature (e.g. peatlands) that are threatened by fire, agriculture, or unplanned commercial development.

These mitigation measures should be carried out in combination with the eradication of extreme poverty, and they will require new skills and behavioural changes. For the energy sector, mitigation efforts are not expected to prevent poverty alleviation from happening, according to the IPCC. It will rather be a question of equality, with US citizens currently consuming
150 times more energy per capita than Ethiopians.

The financial sector has to play a critical role in redirecting money from problems to solutions

Financial institutions can use the IPCC's 6th assessment reports as their compass for investment decisions, tackling climate-related financial risks, and spotting opportunities associated with the transition of economies, companies, and societies towards net zero emissions. Decision-makers can already pursue three key actions to get ahead of the anticipated climate impacts that the IPCC has laid out:

• Call on governments to implement stronger climate policies. that include a price on carbon and that end fossil fuel subsidies as well as any new fossil fuel-based energy projects. A carbon price of over US$ 100 could support the net zero objective. Governments can also impose strict disclosure rules and thresholds, in line with science. A compelling example is the EU SFDR in conjunction with the EU taxonomy, where recent debates on the inclusion of nuclear and gas remind us of the importance of such initiatives staying within the boundaries of scientifically approved low-carbon activities. In absence of stricter regulation, financial institutions also have a role in fostering and implementing these broadened regimes. Finally, the impact of environmental education on employees and society shouldn't be underestimated.
• Shift exposure away from carbon-intensive assets to low-carbon investments. Financial institutions should begin by completely phasing out coal by 2030, following the Science Based Target initiative's (SBTi) recommendation, and by reducing their direct and indirect exposure to other fossil fuels through ambitious energy policies. This should rapidly be expanded to other sectors, beyond fossil fuels.
• Disclose progress transparently. Financial institutions should share their progress on climate goals by regularly disclosing their exposure to fossils, deforestation, and other carbon-intensive activities. They should clearly measure and communicate the carbon impact of their investments following the PCAF methodology and should demonstrate how they are aligning with the latest IPCC climate science, using frameworks like SBTi's financial sector guidance.

With so much to lose and so little time to act, financial institutions can help bring about the transformative changes we need from political decision-makers and corporate leaders – all while hedging against the physical (and transitional) climate risks outlined by the latest IPCC report.