PwC’s sustainability & climate change team preview the IPCC AR5 Science report

Published at 19:15 PM on 25 September 2013

PwC's sustainability & climate change team preview the implications of the IPCC report for business, including analysis from PwC’s Low Carbon Economy Index, and the impact of international climate change on the UK.

PwC’s sustainability & climate change team includes specialists in climate science, policy, energy & renewables, climate & business strategy and carbon emissions.

Call Gill Carson (07715 487553) or Rowena Mearley (07841 563 180) for comment or interview on the release of the IPCC AR5 this weekend, or follow our reaction online @pwcclimateready


PwC Low Carbon Index: Is shale gas making an impact?

PwC’s Low Carbon Economy Index has tracked the changes in global, and the G20’s carbon intensity (the measure of carbon per unit of GDP), since 2008. Since then, global carbon intensity has fallen by an average of only 0.7% a year, a fraction of what is required to keep emissions on track to limit global warming to 2C by 2100. Reviewing the last five year’s progress, it shows that:

  • 92% of the small reduction in carbon emissions intensity is accounted for by energy efficiency improvements, and only 8% through a shift towards cleaner energy
  • Even as we become less dependent on oil for energy, the global fuel mix remains heavily reliant on fossil fuels, with coal in particular experiencing increasing usage
  • The overall share of gas in 2012 has been relatively unchanged from 2000-2007, undermining the belief that shale gas is revolutionising the energy mix
  • The share of renewable energy sources increased from around 7.2% to 8.6%, with the rate of increase in the last five years significantly higher compared to 2000-2007
  • Despite the levels of investment in Europe the share of renewable energy remains below 10% of the total energy mix in the EU
Jonathan Grant, climate policy and emissions specialist at PwC comments:

“The emphasis is on energy efficiency as a cheap, and effective way to get quick wins on emissions reduction, but it’s nowhere near the scale of change we really need. The worry for a business is that policy shocks force action on climate change rather than incentives and innovation.”

“The IPCC report will be the most authoritative review of the science of climate change we have ever had, with an intense review process and scrutiny over the findings. While there may be debate about some of the details, the main message of the report is clear: climate change is real, and governments and business need to take action to address the potential risks.

“For many companies, the debate about the science is over.  They recognise that climate change is happening, are identifying risks to their business and making investments to address them. Four out of five (83%)[1] companies in the Global 500 index have reported physical impacts of climate change as a risk.  Over half consumer goods companies (53%) have stated that changes in rainfall extremes and droughts are a particular threat to their operations.


“Climate change is the mother of all risks”

Dr Celine Herweijer, partner, PwC, and climate policy and business resilience specialist:

“For business, planning for a 2C world is about business resilience. Planning for a 3C or 4C world is about business and societal survival. It’s not a world any of us should be planning for. The last time we had such a difference in global temperature (in this case colder), we were in an ice age.

“The fifth IPCC report will show even more clearly the scale of risk we face from un-managed climate change, and the importance of greenhouse gas emissions being reduced so we have a reasonable chance of limiting global temperature change to 2C.

“It’s clear that if we continue on our current trajectory of emissions, we will be well beyond 2C by the end of the century.

“For business it is not about arguing with scientific consensus; it is about understanding the scale of the risk. This is about simple business risk and planning: where can you invest, how can you protect your infrastructure, where can you source supplies; what is the cost of commodities, what’s your plan b?”

“When we speak to CEOs of global corporations, the top issues on their minds are growth, costs, resilience and reputation. Climate change impacts each of these. The changing frequency and severity of extreme events, and more gradual climate shifts will increasingly impact business – from security of supply of water and commodities to business continuity, asset value and operating conditions.  The issue is that if business models are based on past experiences alone then we will become increasingly more exposed to losses in the future.

“Business understands the concept of dealing with risk, and climate change is the mother of all risks that we’ll face this century.

“One thing is clear even as we wait for the detail, that the current rates of emissions reduction falls far short of what is required to decarbonise the global economy to avoid some of the dangerous impacts that the IPCC has warned. 

“It’s not just climate impacts in the UK.Even if the UK copes with localised climate change issues, flooding or drought for example, we’re cannot hide from international climate change.

Global supply chains link us directly to hazard prone and oftentimes poorly prepared countries in developing and emerging economies  on the front line of climate change. For example, 80% of the FTSE350 assets are overseas. We have already seen that recent headline disasters across the world, can impact our high streets and UK PLC share prices back home. It’s these supply chain and market risks that are hardest to manage.

“Business needs to get to grips with examining risk in a different way. Particularly at risk are  high value fixed assets like manufacturing sites and energy, utilities and mining sites – if they are built assuming risks today will be the same as those in decades to come – they risk depreciating in value and in the worst case becoming stranded assets.

“Then you also have businesses with revenues sensitive to changes in weather and climate such as tourism, retail, agribusiness, energy and insurance. Looking forward insurers, for example, may find that in some regions of rising risk, the required premiums may simply become unaffordable for homeowners and businesses.

Businesses can do a lot by themselves but they can’t provide all the answers. Companies want and need governments to minimise the risks they will face; they want clear, consistent and long-term government policies and investment that will prevent warming beyond 2C”


“We need to be very careful not to pick and choose the facts we want to be guided by”

Will Day, climate change advisor to PwC:

“The very nature of science means it does probability and likelihood, not certainty. So it’s only natural as human beings, that when we hear there’s a 95% chance of something bad happening, we cling onto the 5% that it won’t.  You wouldn’t get in a car with a 95% chance of crashing, but we seem happy to take an equivalent level of risk with climate change.

“We need to be very careful not to pick and choose the facts we want to be guided by, if we’re serious about managing risk, building economic recovery and sustaining growth. There’s enough policy and technology possibilities and options right now to build low carbon growth that are good, defensible, and attractive and enable the planet to live within its means.

“The real failure has been to link economic growth, the environment that fuels and feeds it, and the fundamental nature of business risk. The message has been – intentionally or unintentionally – that the environment is something you deal with when you’re developed, and you’ve got other economic issues sorted, not something to do at the expense of growth.”


Developing countries: “For many … rising costs from climate related extreme weather events is driving action”

Sam Bickersteth, director, PwC, and CEO, The Climate & Development Knowledge Network (www.cdkn.org), specialist in developing country impacts,  AR5 communication and outreach to policy makers

“The physical science IPCC report underpins the knowledge for policy choices and action but the results of other parts of the Fifth Assessment on impacts and mitigation options to be published in March and April 2014 respectively will add important evidence to inform decision makers in business and government.  

“Climate change policies are in place and being developed in many countries around the world primarily in response to national level drivers for action.  Science is just one of those drivers.  For many of the countries in which CDKN is working it is rising costs arising from climate related extreme weather events that is driving action.

“Countries like El Salvador, Kenya and Pakistan are not sitting on their hands waiting for a perfect answer in the science or a global climate deal. Rather they are taking action now on the best available information and science drawing on their own resources and capabilities.  The IPCCs latest assessment will enable a better assessment of risk and future opportunities to inform future decision making at both the national and international levels. 

Led out of PwC, CDKN has been supporting policy development in countries such as El Salvador arising from increasing frequency of hurricanes, in Kenya in response to droughts and in Pakistan in response to massive flooding. For more information see www.cdkn.org. CDKN commissioned reports on the managing the risks of extreme weather events on agriculture, water and health sectors, which can be downloaded here.


“The challenge facing business is significant and increasingly complicated”

Business impacts of climate change

Jonathan Grant, director, PwC:

“The challenge facing business is significant and increasingly complicated: companies must not only meet shareholder demands for financial returns but also prepare and adapt for a different future. This means reducing their emissions, reviewing their strategies to integrate environmental impacts and working with their suppliers and consumers to address the issue.”

The impact of climate change varies from sector to sector.

  • In a recent report on the climate change strategies of the world’s largest 500 companies by PwC and CDP: Four out of five (83%) companies in the Global 500 index have reported that physical impacts of climate change are a risk.  CDP/PwC Global 500
  • Energy companies reported that they are upgrading their offshore oil rigs in the Gulf of Mexico in response to the threat of more intense hurricanes. CDP/PwC Global 500
  • But physical impacts of climate change are also high on the list of risks:  changes in precipitation extremes, changes in mean temperature and changes in temperature extremes are noted as risks by two thirds of utilities companies.  Utilities note that climate change is expected to have direct and indirect impacts on their business.  For example Scottish & Southern Electricity report that severe and unpredictable weather events represent a risk to their own buildings and sites as well as those of their customers, suppliers and employees.  Delivery of turbines could be affected by disruptions in their supply chain.  CDP/PwC Global 500
  • Retailers, such as Tesco are analysing their supply chain to consider the impact of climate change on agricultural commodities. CDP/PwC Global 500
  • Mining companies have described how water scarcity might affect their operations in sub-Saharan Africa.  Nearly half of telecoms companies state that changes in mean temperature is a risk. CDP/PwC Global 500
  • For insurers, a changing climate means more historically unprecedented events – and pricing risk using models that only look back at past risks will no longer work. In the future, insurers may find that in some regions of rising risk, the required premiums may simply become unaffordable for homeowners and businesses.
  • Particularly at risk are high value, long lifetime, fixed assets, like manufacturing sites, energy, utilities and mining sites. Infrastructure investors including the power sector will invest $1trillion per annum over the next two decades in developing countries, and all of it will need to be climate resilient.
  • The UNISDR reported that the private sector is responsible for 70 to 85% of worldwide investment in new buildings, industry and critical infrastructure. The level of risk that is exposed to is directly linked to the where and how of this investment. 

“British business is already feeling the effects of climate change”

The international impacts of climate change on the UK

A report by PwC for the UK’s National Adaptation Plan concluded that climate change impacts around the world multiply existing threats to the UK, and some of these would be greater than the threats from climate change on home soil. This is based on a medium emissions scenario consistent with 2°C warming. The main threats identified were:

  • damages to physical and financial assets from extreme weather
  • increased frequency and urgency of humanitarian assistance
  • increased volatility in food prices; political or policy reactions affecting availability of food supplies, and
  • increased demand for UK Government services by overseas territories and citizens abroad.

Climate change acts a multiplier of risks and opportunities. Taking action now increases the UK’s capacity to adapt and also ensures we make the most of the opportunities, by investing in the skills, R&D, and services that are needed.

Summary of findings:

  • Climate change impacts around the world multiplies existing threats to the UK, and some of these could be an order of magnitude greater than threats from domestic climate impacts.
  • There are also opportunities for the UK, but the threats outweigh these considerably, both in terms of their magnitude and our confidence in the probability they will occur.
  • In the short term, damages to UK assets abroad, demand on foreign aid and humanitarian assistance, and increased volatility of prices for food, energy and other resources traded in the global market are the primary threats identified. Price volatility may be amplified by protectionist reactions to extreme weather events.
  • Over the longer term, climate change is likely to reinforce upward price pressures for key resources, alongside other demographic and economic drivers.
  • International supply chain resilience for many key resources is likely to be affected, with implications on health, security and global governance.
  • Recent experience shows that the UK’s close links with stable and mature economies (e.g. the US and EU countries) means that even their relatively stronger adaptive capacity is unlikely to fully insulate the UK from climate change impacts in those countries.
  • The UK will also be exposed to climate change impacts in emerging economies and less developed countries with which it has ties through trade, people, and foreign aid.
  • Currently global production, and as a consequence UK imports, of certain foodstuffs tend to be concentrated in a few countries. In the short-term (to the 2020s) extreme weather events, exacerbated by climate change, are highly likely to increase volatility of prices and cause disruptions of supply. Over the longer term (to 2050s and 2080s) the increasing impacts of average climate change could lead to more pervasive systemic changes to trade in food and other physical commodities with knock on effects in other areas such as health, security and global governance.

Further analysis: See the full document here


Impacts on business and investment (page 22)

The UK holds nearly £10 trillion of assets abroad as of the end of 2010, therefore it is likely that physical damage or financial devaluation of even a very small proportion of these assets can be significant.

Food (page 38)

  • UK food supplies are underpinned by global food supplies. The main threat is fluctuating and volatile prices as a result of disruptions in the production, transportation and distribution of imported foodstuffs.
  • In the longer term, impacts of climate change on crop suitability and water availability could lead to price increases. As a mature, low risk and stable economy, the UK is comparatively less vulnerable to global food price shocks, however there are still cost implications to the UK and in particular the poor.
  • The US, Brazil and China are important trading partners which may experience reduced crop yield or shifts in agricultural zone in the next 10-20 years, leading to reduced production and potential availability of exports to the UK.
For a map of climate related impacts on food production by region, and strength of UK links, see page 41

Health and wellbeing (page 50)

  • Climate change impacts on health are likely to be felt more severely in other countries than the UK. The increased need for health services may imply a greater demand for UK health professional who are already involved in providing humanitarian assistance.
  • In Western Europe, the main health impacts will be similar to those expected in the UK, for example heat related mortality.
  • The UK pharmaceutical sector may be able to capitalise on greater demand for medicine and vaccines.

For a map of climate related impacts on health and wellbeing by region, and the strength of their links to the UK , see page 52)

Foreign policy (page 57)

It is difficult to assess the impact that climate change is likely to have on global governance and other areas of foreign policy. However, UK foreign policy goals such as the provision of aid to the poorest and the maintenance of peace and security may therefore need to overcome the additional strains from climate change.

Climate change is likely to put pressure on the delivery of UK public services abroad, in particular the work of military personnel, aid agencies, consulates and embassies.

Case studies

Trade & climate change (page 72), revealing that the two product group potentially most at threat are gas and apparel and clothing.

Food: Impact of US drought in 2012 on UK (page 80)

Insurance: The UK insurance industry is the third largest after the US and Japan accounting for 7% of worldwide premium income (page 90).

Illustration of the knock on impacts from trade disruption to the rest of the UK economy caused by international climate change

Impacts

PwC’s sustainability & climate change team

PwC’s sustainability & climate change team includes specialists in climate science, policy, energy & renewables, climate & business strategy and carbon emissions.

Call Gill Carson (07715 487553) or Rowena Mearley (07841 563 180) for comment or interview on the release of the IPCC AR5 this weekend, or follow our reaction online @pwcclimateready


[1] Numbers based on the CDP Global 500 report (2013). “Sector insights: what is driving climate change action in the world’s largest companies?”

http://www.pwc.com/gx/en/sustainability/publications/carbon-disclosure-project/index.jhtml


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