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Companies are finally starting to think about what their business will look like in a 2C warmer world – but it may not be enough

Photo: Williams West/AFP/Getty Images

Companies grappling with financial risks from efforts to limit climate change are beginning to go further than just factoring in a 2°C future.

Australian-listed resources company Oil Search is one example. Under pressure from climate campaigners and investors, it agreed to conduct a detailed analysis and disclosure of its risks from efforts to limit global warming to 1.5C – 2°C, in line with the Paris Agreement, which was adopted in 2015 by almost every country in the world, and came into effect last year.

At the Oil Search AGM in Port Moresby on Friday [May 19], the campaigning group Market Forces will announced it had withdrawn a shareholder resolution after the company’s commitment.

Plenty of research shows that to meet the Paris Agreement goals, much of the world’s fossil fuel reserves will be “stranded”, which would mean losses for investors in the companies that own them – thermal coal companies being an obvious example. Other industries, such as electricity generators and automotive manufacturers that keep up with the transition away from greenhouse gases, could also be losers – there evidence these secondary industries have already been affected.

Shareholder resolutions about climate risk are becoming more and more common as the Paris Agreement has “brought a new impetus to shareholder campaigns on climate change”, as Harvard Law School notes.

Big asset managers are also joining in climate-related resolutions, which were once the preserve of smaller pension funds or ethical asset owners. Last week, a similar resolution on comprehensive climate risk disclosure was approved by Occidental Petroleum shareholders, against the board’s recommendation.

BlackRock was among those who voted in support of the Occidental resolution – the first time that the world’s biggest asset manager has voted this way on a shareholder climate resolution, a spokesperson told Bloomberg. Back in March, BlackRock warned companies would begin voting against directors who can’t show “demonstrable fluency” in regards climate change and other emerging risks and opportunities.

Back to Oil Search. What’s interesting about the company’s commitment to disclose climate risk is that it explicitly identified the 1.5°C climate change objective, rather than just focusing on the 2°C limit that has been a mainstay of climate ambitions for many years.

Last week saw another first in climate risk, UK retailer Tesco, the world’s fifth-largest grocery chain by sales, announced it would plan to rein in its own emissions in line with a 1.5C scenario. The UK’s Carbon Trust told the FT it was the first corporation to publicly commit to a 1.5C plan.

1.5C – what, where why?

Anyone with a passing interest in climate change has probably heard of the “2 degrees” target of warming.

If you’re a stickler for facts, the “2°C target” was never quite right anyway; it was always an upper limit, not a target. The Paris Agreement actually commits to limiting warming to “well below 2C”, and to “pursue efforts” to limit warming to 1.5C.

Including 1.5°C as a surprise to some – but a lot of scientific research has been pointing for years to the fact that 2C is actually not at all safe.

For example, it’s now well established that all the world’s coral reefs will likely be severely degraded if the world warms by 2°C. If warming is limited to 1.5°C, it’s estimated about 10 per cent can be saved.

Heatwaves will be substantially worse under a 2°C future than under 1.5°C, along with many other impacts of climate change.

Scientists Andrew King, Ben Henley and David Karoly last week published this chart in The Conversation, drawing on a new paper they’ve had published in Nature Climate Change:

Source: King, Henley and Karoly, The Conversation

The risks of “tipping points”, in which some warming triggers more warming or abrupt and catastrophic changes, are much higher under 2°C. In 2015 the lead author of a large study into tipping points wrote:

Our results imply that there is no window of “safe” global warming and no threshold separating safe and dangerous climate change. Every 0.5℃ temperature increase is similarly dangerous.

So, how hard might it be to limit warming to 1.5°C? To be fair, it is onerous – but not that much harder than 2°C. Below is a simplified table, drawing on a large study of climate mitigation scenarios published in the scientific journal Nature:

Source: The Climate Institute, 2017, using data from Rogoelj et al, 2015

There is already a good array of data available for investors and businesses wanting to understand the implications of a 1.5°C future – and more will be available as the International Energy Agency releases a new scenario later this year. IEA scenarios are heavily relied upon to model climate risk in the private sector, so we will likely see more work around what 1.5°C means.

In the meantime, our organisation has just published this guide to the 1.5C objective for businesses and investors.

Kate Mackenzie is head of finance and investment at The Climate Institute, an independent, not-for-profit, evidence-based research and communications group.

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