Right direction, but not fast enough Right direction, but not fast enough Right direction, but not fast enough

We look at what the latest report from the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) on national climate pledges means for governments, and the challenges and opportunities for business.

5 key takeaways

• The United Nations’ Intergovernmental Panel on Climate Change (IPCC) has said that it will be ‘impossible’ to limit warming to 1.5°C by the end of this century, thereby avoiding the worst effects of climate change, if global emissions do not peak by 2025.
  
• The latest country pledges, called Nationally Determined Commitments (NDCs), fall dangerously short of what is required to limit warming to 1.5°C, or even 2°C. The world is currently on track for 2.4°C-2.8°C rise by the end of the century. Every 0.1°C temperature adds significant climate damage. If current NDCs were fully implemented, emissions would peak by around 2030, but not drive quickly enough the downward emissions trend needed this decade.
  
• UN bodies are calling for national governments to strengthen their climate action plans now, and implement them this decade. The next two years will be critical to get on the right track, before the window shuts to preventing the worst effects of climate change.
  
• The current and predicted effects of climate change are rapidly impacting the strategic outlook for the global business community. Businesses and investors are seeing an increasing exposure to transition risks, such as stranded assets, destruction of value, and a rise in uninsurable assets. They are also having to deal with the increasing physical risks of climate change, with some further damage baked into even the most optimistic forecasts for decades to come.
  
• Businesses have a huge opportunity to lead from the front. Although many have set Net Zero targets, complying with the evolving climate disclosure requirements and standards is complex work. Businesses should not underestimate the effort required to design and implement meaningful transition plans – the urgency for climate action, and benefit, has never been clearer.

What’s been published

Three major new reports have recently been published to add impetus to the COP27 negotiations.

On 21 October, UNEP published its annual Emissions Gap Report, this time entitled ‘The Closing Window’. It suggests that full implementation of all unconditional and conditional made by governments to date would result in global warming of 2.4°C by 2100. Many of those commitments are not yet supported by implementation policies, that is, a plan on how to achieve them. As a result, the world is likely currently on track for global warming of 2.8°C this century. 

This conclusion was backed up on 26 October by the UNFCCC’s synthesis report which focuses on the critical decade period to 2030. It shows that current commitments will increase emissions by 10.6% by 2030 compared to 2010 levels, and not increase further after that. This is a slight improvement on last year’s report ahead of COP26 which projected that emissions would increase by 13.7% by 2030, and continue to increase after that. However, that limited improvement will not deliver the rapid downward trend science says is necessary this decade.

To limit warming to 1.5°C, global annual emissions would have to reduce by 45% by 2030, compared with emissions projections under existing policies. For context, each year, emissions would need to reduce by roughly the same amount as during the peak of covid emissions drops. 

On 26 October, the UNFCCC also published a synthesis report on the 53 long-term low-emission development strategies (LEDCs), covering 62 countries that are party to the Paris Agreement. These LEDCs cover 83 percent of global GDP, and focus on plans to reduce emissions by mid-century. If implemented fully, the commitments in the LEDCs would amount to a 68% reduction of GHG emissions by 2050 compared to 2019 levels. However, many net-zero targets remain uncertain and postpone into the future critical action that needs to take place now. 

The sobering upshot of these reports is that the world is dangerously off track to meet its climate targets. Without concerted collective effort at and beyond COP27, a stressed by United Nations Secretary General António Guterres, the world will likely move closer to ‘irreversible’ climate breakdown. Now is the time to hold the course on climate action, despite wider global challenges.

Broader context

At COP26 in Glasgow, the Glasgow Climate Pact aimed to turn the 2020s into a decade of climate action and support. Ahead of COP27 in Sharm el Sheikh, 26 countries have published new or updated carbon reduction commitments in the form of NDCs, including major emitters India, Brazil, the UK and Australia – a number much lower than expected and required for concerted global climate action.

The IPCC is approaching the end of its sixth assessment cycle. Following recent reports from its three working groups, the IPCC will publish a final synthesis report in late 2022/early 2023, ahead of the Global Stocktake planned for 2023. The working group III report, published in April 2022, made a stark warning that time is running out to avoid the worst impacts of climate change. The report said that physical climate change impacts are materialising faster than previously expected, and that many modelled pathways will ‘overshoot’ the carbon budget for 1.5°C. The report concluded that it will be ‘impossible’ to limit warming to 1.5°C by the end of this century if global emissions do not peak by 2025.

COP27 is taking place in Egypt from 7-18 November, where countries will again come together to consider global action and finance on climate change. COP27 President-Designate, Sameh Shoukry, has called it ‘the world's watershed moment on climate action’.
 

The rise of disclosure requirements, and evolution to transition planning

The overwhelming message from the trio of UN reports is that governments need to take greater action on emissions reductions and on the rapid transition to low carbon economies. This includes setting country net zero targets with decarbonisation pathways supported by implementation policy that, in total, cap emissions at the level required to hold the global temperature rise to 1.5°C. Unless urgent action is taken in the next few years, staying below 1.5°C, and even 2°C, may be beyond reach.

In practice, while governments can set legislative targets and regulatory frameworks, much of the decarbonisation heavy lifting will fall to business, whose activities constitute a large proportion of the global emissions base. As the UNEP report acknowledges, decarbonisation of electricity, industry, transportation and buildings is underway, but accelerated action is needed. Some of the challenges to economic restructuring identified by the report include avoiding lock-in to fossil fuel intensive infrastructure; enabling the transition with the development of zero-carbon technologies, market structures and plans for a just transition; and promoting behaviour change to sustain and deepen reductions.

A key challenge to such long-term low-carbon development is unblocking green finance flows. Banks and other financial institutions are increasingly standing ready to lend to projects relating to climate and nature and biodiversity, and many have committed to greening their loan books, often in connection to their plans to reduce their financed emissions. For example, in the UK, mortgage providers are developing green mortgages for customers in energy-efficient properties, or undertaking retrofit work to install insulation and low carbon heating. Acceleration of the green finance transition will require further enhancement of financial and economic policy measures and mechanisms. In the UK, the EU and elsewhere, the regulatory landscape is being complemented by green taxonomies to help form a common understanding of activities that support or are harmful to the environment.

Disclosure under the Taskforce on Climate Related-Financial Disclosures (TCFD) framework is helping to drive the needed business changes, by providing transparency to stakeholders on the exposure of businesses to the physical and transition risks, opportunities and impacts of climate change. Quantifying these factors to assess business, financial and operational resilience in a hotter world is a key action required to inform strategies that can tilt businesses towards value creation and preservation in a hotter world. Countries such as the UK have mandated these disclosures for listed companies, including banks, insurers and asset managers, improving decision-useful information for investors and other stakeholders.  

Climate disclosures are just the first step towards the net zero transition. The TCFD requirements are evolving to include transition planning, which will require organisations to disclose ‘how’ they will transition to reach their decarbonisation and other goals, with a plan that stacks up. Guidance on the shape of transition plans in the UK is expected to be released by the Transition Plan Taskforce at COP27, for consultation ahead of mandated transition plans for listed companies.

“The world is currently speeding towards temperature increases of 2.5°C, when it should instead be turning sharply towards 1.5°C. We are not yet seeing the scale of emissions cuts the IPCC says is needed before 2030 to reach the long-term global temperature target. The key challenge for businesses is to figure out ‘how’ to reach their net zero goals. Without it, the costs to respond to climate impacts will be far greater than the investment needed to reach net zero.”

Stuart Bruce

KPMG Director and Independent Expert Reviewer of the IPCC WGIII report.