The identification of climate risks and opportunities in our climate risk scenarios, is based on the IPCC. The most common timeline is until 2050, with net carbon neutrality by then. For the translation into our target setting, we focus on the interim milestone of a reduction in global emission of 50% by 2030. This year is crucial in our scenario planning. Based on this, we derive the medium-long term risk scenarios run until 2025.
Transition risks: certain industries are already being affected by climate change, where we observe changing public opinion and investor sentiment and new regulation. For example, studies already indicate that the cost of capital for companies in the energy and utility sectors that rely on fossil fuel has increased in the past 5 years relative to renewable energy providers. We believe more sectors will become impacted in the next 5-10 yrs as regulations increase. Ultimately (10+ yrs) all companies have to become significantly more efficient as energy efficiency is a major contributor to getting to net zero carbon emissions.
Opportunities: we have been seeking opportunities from climate adaptation and mitigation since the launch of our Smart Energy fund in 2006, and expect the opportunities will accelerate significantly as society recognizes the risks we face from a significantly changing climate. The need to reduce emissions by 50% by 2030 and to net zero by 2050 gives a concrete idea of how things should develop. We continue to assume that society will act in its best interests, although we are clearly procrastinating and expect much of the investment to come at the last minute.
Physical risks: these have the longest timescales for broad-based impacts, but we already see major events making the acute risks clear in the short term. For example, the drought in Europe in 2018 disrupted supply chains on the continent, surprising many investors. Fires in California were another early example (2014-2017), the risks from which are now perfectly clear to most from Australia in late-2019. In the medium term (10+ yrs), severe weather will continue to increase and loss from floods and severe storms is a concern. However, the largest impacts come from potential sea level rise of several meters on one side and water shortages on the other if glacier melting accelerates in the long term.