UN’s IPCC report tightens focus on climate risks for business: What executives need to know

Unequivocal consensus: emissions must peak by 2025, halve by 2030 in order to avoid the worst climate change scenarios. Mission critical for customers, markets, investors and executives

Among headlines of geopolitical strife, broken supply chains, and rampant food and energy inflation, it can be hard to process the latest report, Working Group III - “Mitigation of Climate Change,” from the Intergovernmental Panel on Climate Change (IPCC), published on Monday, 4/1. The report outlines the mitigation of climate change, building off of the 2 prior reports in this assessment cycle (Working Group I report focused on the physical science, Working Group II report focused on Impacts, Adaptation and Vulnerability).

This report seeks to assess “the current state of knowledge on the scientific, technological, environmental, economic and social aspects of climate change mitigation” and illustrates that food insecurity, mass migration, increased conflicts and supply chain disruptions, among other risk cascades, will become much worse if we do not act now to make changes to our lifestyles and to the global economy.

In short, this report shows that the window of opportunity to avoid the worst climate scenarios will soon close unless there are immediate and deep emission reductions across all sectors of the global economy. The call to action is clear: the time for action is now. Navigating the complexity of the interconnected crises (e.g. biodiversity loss, ozone depletion, chemical pollution, freshwater depletion etc.) surrounding us is not easy, but it is feasible.

Across sectors, PwC is helping executives understand their organization’s exposure to climate-related risks and opportunities, integrate decarbonization with business strategies aligned with the latest science, and navigate increased regulatory pressures.

What you need to know about the IPCC’s WGIII Assessment Report 6 (AR6): Not enough progress to date, but immediate and deep emission reductions across all sectors can still avoid the worst climate scenarios

The report makes it clear that although there is increased evidence of climate action, we are not on track to avoid the worst climate change scenarios, which would require limiting warming to 1.5 degrees celsius. For us to remain under 1.5, global GHG emissions need to peak before 2025 and decrease by 43% by 2030.

Beyond the 1.5 degree threshold, any small temperature increase will have a disproportionate effect and trigger feedback loops that may cause irreversible damage to our fragile ecosystems and natural resources.

Increases in temperature, rainfall, sea level rise, and extreme weather events such as wildfires, hurricanes, tornadoes, floods, landslides, and severe storms will have impacts throughout society. Business assets, supply chains, and our communities will continue to be impacted more frequently and with higher intensity than we’ve recently witnessed as a result of these increases.

We encourage organizations to understand what this means to them, taking into account second and third degree effects, such as water scarcity, crop failures, loss of infrastructure and livelihoods, which can in turn cascade into food, energy and health crises as well as threats to national and international security, economic and trade disruptions, increased migratory pressures and even the failure of sovereign states.

The report emphasizes that the window of opportunity to reach net zero by 2050 and limit warming to 1.5 degrees is still open, using solutions that already exist in every sector to at least halve emissions by 2030.

Specifically, it assesses the effectiveness of solutions that exist today and emphasizes synergies to make significant progress towards the Sustainable Development goals.

If rapid action is taken, the impact on GDP growth would be negligible and the long-term benefits would outweigh the initial costs of the renewable energy transition. Additionally, “the economic benefits on human health from air quality improvement arising from mitigation action can be of the same order of magnitude as mitigation costs, and potentially even larger.”

Read the full report here.

1The US National Intelligence Council’s _Global Trends 2040_ report, published in March 2021, highlights that: Climate change will increasingly exacerbate risks to human and national security and force states to make hard choices and trade-offs. The burdens will be unevenly distributed, heightening competition, contributing to instability, straining military readiness, and encouraging political movements.

Your environment is going to change: is your business ready?

As businesses, governments, and consumers alike move to address the climate crisis, the business and regulatory environment of tomorrow will certainly look different.

WGIII aligns with prior analysis that found rapid policy action is expected by 2025 at the latest. Climate laggards will face the challenge of integrating ESG into business practices, while managing the economic impacts of an abrupt transition to a lower carbon economy across their operations.

The latest SEC-proposal is a salient example of the importance of proactive and transparent action by business. On March 21, the SEC proposed new rules that would significantly increase required disclosures about climate-related risks that are reasonably likely to have a material impact on a company’s business or consolidated financial statements. This would be a definitive step in improving accountability, may cause businesses and investors to take a hard look at their carbon footprints and would require them to assess the risks climate change poses to business.

Active interventions to change demand patterns in end-use sectors (e.g., promotion of low-carbon transportation and diets) will have ripple-effects over entire value chains across industry, land, transportation, and real estate.

Consumers are already voting with their dollars for sustainable products. Businesses who want to not only survive, but thrive in the new age will need to deliver sustainable products and services with low carbon footprints that provide durable, lasting value to consumers.

As much as risks are emphasized in this report, the new climate paradigm creates opportunities for those who are able to adapt their business strategy. Companies that react now, while current funding sources are still available, before more stringent regulations are in place will be well positioned in the new sustainable economy.

2(2021, December), What is the Inevitable Policy Response?, PRI, https://www.unpri.org/inevitable-policy-response/what-is-the-inevitable-policy-response/4787.article

Actions you can take today

Understand the potential impacts to your business, across physical and transition risks

Either internally or with expert help, analyze the potential impacts of the IPCC’s findings on your business.

Using several climate scenarios, quantify the risk posed to your operations, supply chain, and market disruptions to understand potential financial impacts to your business. The report's tightened estimate range for global temperature changes and the implications for resultant physical risks will factor into private sector assessments. How does the latest analysis by the IPCC affect your assumptions about exposure to extreme weather events, demand shifts and/or opportunities in your business and industry?

Read more on climate risk modeling.

Enhancing your resilience

Does your current strategy, structure, products, distribution ecosystem, partnership position remain profitable under different climate change scenarios? How can you integrate the insights of your climate-risk assessment into your business to increase its resilience in the face of an accelerated decarbonization transition, and changes in market dynamics?

Informed by the first two reports in this IPCC cycle, business leaders must look at how to enhance their business’s own resilience against physical risks:

  • Assess how you can future-proof physical property in a cost-effective manner. In some cases, you may look to relocate your most vulnerable facilities and assets.
  • Enhance your business ecosystem by addressing physical risks from extreme weather events on supply chains and  educate  your partners on the imminent dangers of climate change. Take further actions to improve supply chain resilience such as proactively identifying alternative suppliers, substituting raw materials, and hedging commodities.

Seek science-aligned ways to decarbonize your business

Measure your carbon footprint to identify major drivers, quick wins, and what short and long-term investments need to be made to decrease the footprint in line with climate science. In the case of Financial Institutions, this means understanding the emissions in your investment portfolio, and potentially in your lending and underwriting operations.

Commit to Net-Zero and set science-based emission reduction targets while instituting operational, technology, and governance changes to track your progress towards your goals.

Focus on absolute emissions reductions, bringing down the carbon intensity of operations such as production and processing, transportation & distribution, and building energy efficiency. While Carbon Dioxide Removal (CDR) is required to counterbalance hard-to-eliminate residual emissions, “Afforestation, reforestation, improved forest management, agroforestry and soil carbon sequestration are currently the only widely practiced CDR methods.” When considering offsets, make sure the criteria of additionality and permanence are met.

Increase electrification of facilities and assets, transition to renewable energy and sustainable fuels to increase energy efficiency savings. The per unit cost of low-carbon technology continues to trend down over time and is expected to remain competitive with fossil fuel sources.

Do not rely solely on future technologies. “Implementation of Carbon Capture and Storage (CCS) currently faces technological, economic, institutional, ecological-environmental and sociocultural barriers.” Emerging technologies will take time to develop and are not expected to contribute meaningfully to the effort to halve emissions by 2030.

Transparently communicate to the market and other stakeholders (employees, customers, investors, suppliers, and regulators).

The initial “alphabet soup” of ESG reporting frameworks is coalescing around established standards. In the case of climate, all roads are currently leading towards the TCFD framework, which serves as a common language for communication and also provides guidance on how to coherently govern and manage climate risks, integrate climate into your business strategy, as well as quantify and manage climate-related risks and opportunities. Leveraging the TCFD framework will position you to effectively respond to other disclosure requirements (e.g., the latest SEC proposal is generally consistent with TCFD guidance).

Building the capability to produce investor grade, tech-enabled ESG reporting presents unique challenges across people, process and technology. While mandatory disclosures might not be imminent, it is important to start preparing capacities and data now.

Beyond regulatory pressures for disclosure, investors, employees and customers are increasingly “TCFD-literate.” It may be beneficial for you to connect with other stakeholders on climate. Effectively communicating your progress on reducing climate risks to stakeholders and consumers through consumer programs and marketing strategy demonstrates your company is proactively taking meaningful action.

While prior IPCC reports have had a more cautious tone, the consensus from this report is definitive. The first report in this cycle stated that this is a “code red for humanity.” This third report emphasizes that “The evidence is clear: The time for action is now.”

The updated models and warnings in the WGIII IPCC’s 6th assessment report are meant to guide the world’s policymakers and spur action in the private sector. Executives should take the opportunity to form a deeper understanding of the risks to their assets and businesses as regulatory initiatives find footing, extreme weather events become more frequent, and the market is shaped by mitigation and adaptation at the local and global scale.

Businesses that act quickly and effectively can capture a virtuous circle through taking leadership on climate initiatives, as well as managing the potential economic uncertainty to come.

PwC has a large team of professionals with deep experience in the standards, methodologies and technologies that can help your company move from ambition to action in the decarbonization transition.

About the IPCC

The IPCC is an international body for the study of the science of climate change, set up in 1988 by the World Meteorological Organization and the United Nations Environment Programme. Its role is to provide policymakers with regular assessments of the scientific basis of climate change, its impacts, future risks and options for adaptation and mitigation.

Understanding the contents of these reports gives businesses a view of the data that can help to inform regulation—potentially providing more time to adjust.

Contact us

Casey Herman

Casey Herman

US ESG Leader, PwC US

Graham Hall

Graham Hall

Director, Risk Modeling Services, PwC US

Steve Bochanski

Steve Bochanski

Climate Risk Modeling Leader, PwC US

Brigham McNaughton

Brigham McNaughton

Partner, ESG, PwC US

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