This Insight summarises the key takeaways from the IPCC report for government and corporate decision-makers, and the implications for governance, strategy, risk management and oversight.

What is the IPCC report?

The IPCC, a United Nations body that assesses the state of the science relating to climate change, has just published the Working Group I contribution to the Sixth Assessment Report: Climate Change 2021: The Physical Science Basis (AR6). The report is a phenomenal undertaking of consensus-based science, produced by peer review (by scientists from 66 countries) of peer-reviewed science (more than 14,000 individual studies). Considered the 'gold standard' of climate science, the report is not just a scientific consensus. The report's Summary for Policymakers was unanimously approved by the governments of the 195 country members of the IPCC and will relied upon those governments as the shared evidentiary understanding as they head to the UN climate conference, COP26, in Glasgow this November.

AR6 builds on and updates the findings of the Fifth Assessment Report (AR5), published in 2013, as well as three special reports by the IPCC published in 2018-19 to inform the implementation of economic decarbonisation goals agreed to by the 196 country signatories to the Paris Agreement (to limit global warming to 'well below 2°C' above pre-industrial averages, and to pursue efforts to limit warming to 1.5°C). AR6 will be followed by two further reports on impacts, adaptation and vulnerability. and mitigation, in early 2022.

What AR6 does not do is contain policy recommendations. But the strength of its conclusions are likely to trigger a significant response by policy setters, capital markets and real economy participants. In the words of UN Secretary-General Antonio Guterres:

the alarm bells are deafening…[this is] a code red for humanity”

Antonio Guterres

What are the key takeaways?

The 41-page Summary for Policymakers (SPM) is a detailed but digestible summary with excellent graphics of the almost 4000 page report - and is well worth reading. We have provided a roadmap to help you navigate the key findings.

• The world is warmer than it has been in at least 125,000 years. Global average surface temperatures are on average 1.09°C above pre-industrial temperatures, and now on par with temperatures not seen for at least 125,000 years. The rate at which the world is warming is 'unprecedented' in the last 2000 years, notwithstanding that it is partly masked by cooling from aerosols. Australian land areas are already 1.4°C above pre-industrial averages: (SPM [A.1], [A1.2], [A.3], Figure SPM.1; Australasia regional factsheet)
• Human activities are the 'unequivocal' cause of this warming. 1.07°C of the 1.09°C is due to human influence: (SPM [A1.3]). The report does not mention that these human activities are predominantly the burning of fossil fuels (coal, oil and gas), alongside land use changes, agriculture (both methane from livestock, and the of nitrogen-based fertilisers) and industrial processes. AR6 received approval from fossil fuel producer nations such as Australia, Saudi Arabia, Russia and Brazil.
• This human-induced warming has increased, and continues to increase, the intensity and/or frequency of extreme weather events such as heatwaves, heavy precipitation events (which can cause inland flooding), drought, bushfire and tropical cyclones, as well as gradual onset impacts such as melting glaciers and warmer oceans (which cause sea level rise), shifts in precipitation patterns and acidification of rain: (SPM [A.2]).
• This human-induced climate change is not abstract or distant, but is already affecting every region across the globe. Since AR5 there have been substantial developments in the climate science, and particularly the attribution of observed weather events and their impacts to human-induced climate change. The report points to greater evidence of the observed changes in the climate, and the attribution of these changes to human activities has been strengthened. There is no longer just general evidence that human-induced climate change is increasing the frequency and intensity of extreme weather events – such as heat waves, heavy precipitation, drought, fires, and tropical hurricanes – but also specific evidence of the human fingerprint on certain types of events in different regions. For example, globally, once in 50 year heat waves now happening every decade and with 2°C average warming will happen every three to four years. In Australia, heat extremes have increased, cold extremes have decreased, and relative sea level has risen at a rate higher than the global average contributing to increased coastal flooding and shoreline retreat along Australia's sandy coasts. Human induced climate change has likely increased the chance of compound extreme events since the 1950s, for example, concurrent heatwaves and droughts on a global scale, fire weather across regions of all inhabited continents, or compound flooding events in a region: (SPM [A3], [A3.5], Australasia regional factsheet).
• We understand more about how possible climate futures could play out. This has been bolstered by improved knowledge on climate processes, and in particular findings on 'equilibrium climate sensitivity', which estimates how much global temperatures will rise in response to a doubling of pre-industrial CO2 levels. This had not been updated since the 1970s and was such a wide range that AR5 did not include a 'best estimate'. AR6 WGI settles on 3°C, with a 'likely' range of 2.5°C-4°C. This development helps to fine tune climate models, emissions pathways and temperature trajectories: (SPM [A4]).
• We have five new emissions scenarios – with 'Shared Socio-economic Pathways' (SSP's) replacing the 'Representative Concentration Pathways' (RCP's) set out in AR5. These extend from very low emissions scenario to a very high emissions. In each of these scenarios, total warming depends on past and future emissions – and predominantly cumulative CO2 emissions. Future emissions will lead to future additional warming: (SPM [B1]).
• Climate change will get worse before it gets better: global average surface temperature will increase until at least mid-century under all five scenarios. The report provides an update on progress against Paris Agreement goals. It is now more likely than not we will exceed 1.5°C in the early 2030s under all scenarios, even briefly under the very low emissions scenario. The best estimate for warming is 1.5°C in the near term (2021-2040) under all emissions scenarios except the highest emissions scenario (1.6°C). Even with discernible differences in CO2 concentrations and air quality under each scenario, there are no real discernible differences in warming or climate changes within the next 20 years – near-term responses are marked by natural variability (SPM [D.2]). We start to see difference in warming levels in mid-team (2041-2060), with the range expanding to 1.6°C-2.4°C and, with that, differences in climate impacts. The largest differences in best estimates of temperature are seen in the long-term (2080-2100), ranging from 1.4°C on the very low emissions scenario to 4.4°C in the highest emissions scenario. (Importantly, each of these figures are the mid-point of ranges which form the outer bounds of the 'very likely' outcomes.): (SPM [B1]-[B2])
• Rapid emissions reductions still do matter. The very low emissions scenario involves only a temporary overshoot to 1.6°C: (SPM [B1.3]) This gives some hope for the Paris Agreement goal of limiting global average temperature rise to 1.5°C, around which world governments, investors, communities have coalesced.
• Every additional tonne of CO2 emissions adds to global warming and every fraction of a degree of additional warming matters. Changes in extremes continue to become larger for each additional fraction of a degree of global warming. Even the difference between 1.5°C and 2°C involves much more widespread changes in climate-impact drivers such as heat events, drought, coastal flooding: (SPM [B2.2]; [C1], Figure 10).
• Land and ocean sinks become less effective in higher cumulative CO2 emissions scenarios. While trees, soil and oceans remove more carbon in high emissions scenarios in absolute terms, their effectiveness is reduced, so a lower proportion of GHG emissions are removed from the atmosphere. (SPM [B4.1]) This means we cannot continue to emit and rely on land and ocean 'sinks' to remove carbon from the atmosphere and will have implications for corporate and national emissions strategies that rely on nature-based offsets.
• Some of these human-induced climate changes are 'irreversible' for centuries or millennia. While net negative emissions scenarios (such as those involving carbon dioxide removal or CDR) see a gradual reversal in the increase in global average surface temperature, other changes such as ocean acidification, ice sheet melt and sea level rise continue for centuries: (SPM [B.5]).
• Low probability high impact events should be part of risk assessment. Although unlikely this century, there is a chance of low-probability high-impact outcomes, such as abrupt changes from AMOC ('Atlantic Meridional Overturning Circulation' – a large system of ocean currents that contributes to climatic regulation in the northern hemisphere) shutting down, Antarctic ice shelf collapse, or Amazon dieback. (SPM [C.3])
• Addressing climate change requires net zero carbon emissions globally as soon as possible. Stabilising warming to any level requires net zero CO2 emissions. Limiting human induced warming to a specific level requires a reduction in cumulative CO2 until at least net zero emissions, plus reductions in other GHGs. If this is to the Paris goals of 1.5°C or well below 2°C, this must net zero carbon as soon as possible, plus strong reductions in other GHGs, in particular a 'strong, rapid and sustained' reduction in methane (CH4) emissions: (SPM [D1], [D2]).
• The report provides updated estimates of available carbon budgets. Although no substantial changes to the 1.5°C budgets since the IPCC's 2018 Special Report on 1.5°C. (SPM [D1.3])

Why is this need-to-know for all Australian corporate and government decision-makers?

The report serves as an essential climate guide for Australian corporate, capital market and government decision-makers.

• It reaffirms the 'why' for your net zero strategy. Quite aside from the global agreement, government laws and targets, and economics of the transition, net zero greenhouse gas emissions is an imperative of the physics. The sooner net zero is reached, the less catastrophic the physical impacts of climate change will be. AR6 makes clear that there is no longer any scope for gradual or incremental action to decarbonise the global economy. In the press release to the AR6 report, this was presented in the context of the Paris Agreement goals: 'Unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach'.

Key considerations for Australian business:

• How do we envisage our business will continue to thrive in a 'net zero' economy, and what is our own strategy for transitioning our business?
• Have we committed to an emissions reduction trajectory that is consistent with Paris Agreement targets, across both direct (within business fencelines) and indirect (value chain) emission scopes?
• If not, what is our timeline for considering this issue?
• If so, how do we demonstrate that we have a reasonable basis for, and genuine intention to pursue, those targets? What are the implications for our strategy, business planning, risk management and oversight, and reporting?

• Physics aside, the report is likely to drive accelerated action to reduce carbon, methane and nitrogen emissions – by governments, capital markets and real economy participants – from securities regulators to investors, insurers, and customers. Those actions, in turn, are likely to present a cascade of market risks (and opportunities) that will have a demonstrable impact on Australian business, far beyond the baseline of domestic regulatory requirements.

Key considerations for Australian business:

• Beyond policy regulatory baselines, how are our market stakeholders heightening their expectations on our climate risk management ambitions? What is the view of our investors, insurers, employees and major customers? What are the potential impacts of international regulatory developments on our value chains?
• Have we progressed with plans to achieve our emissions reduction commitments (short- and medium-term targets to progress towards a longer-term net zero goal)?
• What is our strategy for achieving these goals, and how has it been integrated into our business plans and risk management frameworks?
• What commercial opportunities can we leverage in the transition – from product and service differentiation to access to competitive rates of sustainability-linked finance?

• It reinforces the need to consider climate risks on a forward-looking basis, with historical experience providing a limited analogue. AR6 provides useful evidence, tools and standards on which to assess your physical climate risk exposure, as well as the viability of your offsets and carbon budget strategy. There is a new focus on regional-specific: one-third of the 4000 page contents is focused on regional information. There are new tools: the IPCC is making freely available online an Interactive Atlas which allows for users to explore the state of the climate science underling the report across geographies, datasets, variables, values and periods, and seasons. There is a new shared language for physical events and trends: 'climate impact drivers' or CIDs. There are updated carbon budgets. All of this can inform infrastructure and operations, adaptation planning, contractual risk allocation, and transition planning. Access the Interactive Atlas tool.

Key considerations for Australian business:

• Do we understand the physical risk and related exposures to our business associated with climate change – both within business fencelines, and to our key in-bound and out-bound supply and distribution chains?
• Do our strategic planning assumptions and methodologies take a forward-looking view, taking account of current information, or merely extrapolate from 'business-as-usual'?
• What consideration has been given to the climate-related variables that may materially impact on our accounting estimates (financial position) and prospects?
• What range of assumptions are reasonable, and what is our central case?
• Have we undertaken scenario analysis against a range of stressed scenarios – including a disorderly transition to a net zero economy, and physical risks under a high-emissions scenario such as the AR6 SSP5?
• How have these variables been integrated into our accounting estimates, project feasibility models and financial statements disclosures?
• How have these variables and uncertainties been dealt with in the audit and risk processes?