The opportunity to limit warming to 1.5°C with no or limited overshoot has gone, according to the latest UNEP Emissions Gap Report. The lowest overshoot pathway UNEP can still model peaks at 1.7 to 1.8°C and returns to 1.5°C by 2100 on roughly a coin toss. Reaching even that needs global emissions down 45% by 2035. The new NDCs deliver 11 to 15%, leaving a 16 GtCO2e gap, and current policies point to a 2.8°C peak.
Which is a long way of saying that the chance of an orderly transition has died alongside the 1.5°C pathway.
A disorderly transition and a hotter world mean heightened financial risk across the lending and investment portfolios of banks and private equity. The prudential regulator is increasingly focused on exactly that, even as climate disclosure rules from the FCA and the Government soften. Expectations on what firms must do are rising. Requirements on what they must say in public are not.
For a lender or an investor, the only durable protection in that gap is a climate transition plan. Not a glossy public document that ticks a disclosure box, but an internal strategy document built the way a corporate strategy and financial plan are built: bottom up, commercial, owned by the business, and covering adaptation as well as decarbonisation.
Most plans are not built that way. If yours rests on the no-overshoot pathway, four things in it are now wrong: the targets, the scenarios, the pace, and the absence of adaptation. If you do not have a plan, those same four things are what to build it around.
With no updated scenarios to work from, when to act is a judgement call. Our view, and what we would do in each case, is in the full article.
Also in this issue
Climate policy signals look contradictory: lighter disclosure rules, heavier supervisory expectations. Sorting fifteen months of UK policy into saying versus doing shows why holding the two decisions apart lets a Board act on commercial and risk grounds rather than re-planning with every announcement.
Read →
UNEP has retired the no-overshoot 1.5°C pathway; the best case now peaks at 1.7 to 1.8°C. Scenario analysis and 1.5°C-aligned targets built on the old pathway are out of date. Our Climate Target Assessment Framework and scenario tools, aligned to PRA expectations, show banks and private equity what to change.
Read →Tool of the month
Fourteen real-economy indicators, each scored against where policy leads and what net zero requires. Three are on track for net zero. Ask the Data puts your question to the research and returns a cited answer, with sources attached, that you can drop straight into a board pack.
Try it →
Further reading
Board Questions
With policy, regulatory expectations and the climate itself continuing to evolve, these three questions will help craft the right discussion and action in the boardroom. The collateral to support this discussion can be found in this newsletter's articles and in the Low Carbon Transition Index on our website.
What are our targets and scenarios actually calibrated to?
Are we understating climate risk in our numbers?
Do we have a plan the business owns, or a document written for disclosure?
Field Notes
While you might reasonably expect smaller businesses to dismiss transition planning as irrelevant or overkill, we're finding the opposite to be true of late. In the last year we have developed transition plans for businesses including a bank with customer lending of less than £1bn and a PE portfolio company with less than 100 employees. In both cases, the value has been immediate: stop spending time and money on things that don't matter, deliver the things that do in a more pragmatic, streamlined, cost-effective way. The transition plans brought order and clarity to the businesses and completely transformed the climate conversation at Board; suddenly everyone was on the same page as that was the only page that made sense with the evidence presented.
Get Issue 6 the day it lands
Subscribe free →