Business as usual is over - get ready for transformational change

The UN International Panel on Climate Change has released its much anticipated sixth assessment report, reflecting the latest assessments of a global coalition of scientists.

Climate Envoy Mark Carney has said that, for boards, the implications of the IPCC's report are an "imperative for immediate strategic action". We set out below how businesses can respond.

The 3,900 page report sets out a stark warning to governments, markets, businesses and society:

1. We are responsible: It is unequivocal that human activity has warmed the atmosphere, ocean and land.
2. We are going in the wrong direction: Concentrations of carbon dioxide in the atmosphere are higher and rising faster than at any time in the past 2 million years.
3. Climate change is already here: The impacts are becoming more rapid, interconnected and unpredictable and are impacting every continent, such as extreme precipitation, extreme heat and related wildfires.
4. Every fraction of a degree matters: Global surface temperature increases will continue until at least 2050, with every region projected to increasingly experience concurrent and multiple changes in impact-drivers.
5. The future is in our hands: Global warming of 1.5°C and 2°C will be exceeded before 2030 and 2050 respectively unless deep reductions in carbon dioxide and other GHGs occur in the coming decades.

Urgent global action is therefore needed to:

• Reduce global carbon emissions to net zero as quickly as possible now and by 2050 with a significant decline in other GHGs.
• Restore through the removal of carbon dioxide and other GHGs from the atmosphere using negative emissions technologies and nature-based solutions.
• Restructure by adapting to climate change through resilient infrastructure, buildings, agriculture, systems and supply chains.

The report has the following impacts on business:

• Scrutiny: The findings of the report will undoubtedly be used as a basis from which pressure will be applied to companies in high emitting sectors to ensure that action to reduce emissions are accelerated. Shareholder activism is also an increasing trend for boards to navigate. The IPCC's findings should also not come as a surprise. They follow the International Energy Association and the International Renewable Energy Agency reports which recommend urgent action on net zero emissions pathways.
• Policy and regulatory change: The report is also likely to impact on government policies and regulations, strengthening the hand of those within government and society who are urging stronger and faster policy and regulatory responses to climate change. Any proposed changes may be rolled out on a faster timetable than would normally be expected, giving companies less time to adapt. The finding in the report that global heating may exceed 1.5°C by 2030 will increase the impetus of regulators to ensure that firms fully integrate sustainability risk into their business models in the short-medium term.
• Litigation: The 2013 IPCC report has been and is being used in climate litigation, and NGOs have said that the same will apply to the 2021 report, which is based on better scientific understanding. The number of climate-related litigation cases globally is growing, with an increasing focus on human rights and immediate action on climate, as opposed to 2050 goals.
• Liability: There are also implications for directors' duties. As the IPCC's findings are more certain, directors will need to stay on top of developments and regulatory change. Financial services firms should also consider any relevant regulatory expectations. Prudential regulators are increasingly expecting firms assign overall responsibility for integrating sustainability risk to specific senior executives.
• Reporting: The market-led Taskforce on Climate-Relation Financial Disclosures (TCFD) framework specifically requires the evaluation of climate-related risks and opportunities. Companies are increasingly expected, encouraged, and in some cases mandated, to utilise the framework.
• Risk management: Companies are increasingly expected to take tangible risk management measures by shareholders, financial regulators and other stakeholders. Examples of these measures include: carrying out a sustainability risk assessment (focussed on physical and transition risks); reviewing valuation and accounting models and writing down assets where necessary; carrying out climate-related stress-testing and integrating sustainability risk into wider operational resilience and risk management frameworks.

Next steps for senior management and boards:

1. Read the IPCC's 41 page summary of the report here.
2. Assess how climate risk impacts on your people, assets, markets and supply chains, identifying which are the most exposed over the short, medium and long term.
3. Evaluate material climate-related financial risks and opportunities using the TCFD's governance framework. If you are already disclosing in line with TCFD recommendations, it would be prudent to carry out a review in light of the IPCC's latest findings.
4. Develop an action plan to address material risks and opportunities and decide who will be responsible for leading its implementation and review.
5. Engage with stakeholders on the implementation of the plan, including integration into supply chains and disclosures to investors.

Please reach out to your usual Ashurst contact or the key contacts below to discuss how we can help your business respond.