Deutsche Bank – Responsibility
October 15, 2013

“Would you drive a motorcycle without a helmet?”

The impacts and risks of climate change – an interview with Sabine Miltner, Group Sustainability Officer

When 831 scientists from 85 countries collaborate on a publication, it must be about something that affects us all. And when over a thousand more experts contribute as authors and reviewers too, it must be about an issue with global significance: climate change and its impacts.

On 27 September, the Intergovernmental Panel on Climate Change (IPCC) published Volume 1 of its 5th scientific report on climate change. Representatives of 195 governments have now reviewed and approved the findings from a special ‘Summary for Policy Makers’.


What implications does the report have for society? How will the new insights affect Deutsche Bank clients and the financial sector in general?

Ms. Miltner, what does the report conclude?
Firstly and most importantly, the report shows unequivocal evidence for global warming. The past three decades were all warmer than any decade since 1850, and each of those three decades was warmer than the one before. Levels of greenhouse gases such as carbon dioxide or methane are now higher than at any time during the last 800,000 years. Those levels have risen by 40 per cent since the Industrial Revolution. The main causes are emissions from fossil fuels such as coal, oil and gas. Changes in the way we use land ­– including deforestation – are speeding up the process even more.

Secondly, scientists now say it is ‘extremely likely’ that human beings are the main cause of global warming since the mid-20th century. For scientists, ‘extremely likely’ means they are 95-100% sure, just as they are that smoking causes cancer.

Thirdly, the report states that greenhouse gas emissions will have many effects in decades to come. Longer and more frequent heat waves are ‘very likely’, meaning there is a 90-100% probability. Warmer and/or fewer cold days and nights, as well as warmer and/or more frequent hot days and nights, are ‘likely’, meaning a 66-100% probability. More frequent and intense rainfall is also ‘likely’, and agricultural droughts in drought-prone areas are ‘likely’ to increase too.

Climate change also means that our oceans will become more acidic, since they absorb part of the greenhouse gas emissions; that in turn will affect coral reefs and other sea life. As oceans warm, and glaciers and ice sheets melt, the mean global sea level will rise faster than it has during the past 40 years. By 2055, sea levels could rise between 40 cm and 2.6 m, depending on the scenario. If global warming stays at 1-4°C over the next 100 years, we could lose almost all the ice in Greenland, and sea levels could rise by up to 7 m. Even under more optimistic scenarios, this poses a serious threat for major coastal cities like New York.
The report concludes that due to past, present and projected emissions, climate change is certain to continue. Even if emissions stopped today, the effects would persist for centuries to come.

What are the implications for our clients?
Clients of all types are increasingly taking action to assess and reduce their climate change related risks. Climate change is already affecting the business world significantly, and its impact is likely to grow. While the impact varies from sector to sector, 83% of the world’s top 500 companies now see climate change as a business risk.

Growing numbers of companies – including Deutsche Bank – disclose their carbon footprint, strategies and activities via CDP (the Carbon Disclosure Project). Some of this data is available on Bloomberg terminals and is being used by investors. Examples of the action companies are taking include:

  • Two in three utility companies say extreme precipitation and extreme temperatures are a significant risk for their production, and hence for their customers.
  • Some oil companies are upgrading their offshore rigs to meet the threat of stronger storms.
  • Raw material and mining companies are facing a potential water scarcity.
  • Leading retailers are already analysing the effects of climate change on production supply chains such as agriculture.
  • Since today’s risk models are based on past data, insurance premiums may become unaffordable in some regions as weather extremes become less predictable.
sabine_miltner_ausschnitt.jpg

Sabine Miltner, Group Sustainability Officer

“Clients of all types are in­creasing­ly taking action to ass­ess and re­duce their cli­mate change re­lated risks. Cli­mate change is al­ready affecting the busi­ness world signi­ficant­ly, and its im­pact is like­ly to grow. ”

Sabine Miltner Group Sustainability Officer

Risk climate change

83%

of the world’s top 500 companies see climate change as a business risk

All these aspects affect the business sector either directly or indirectly, since more and more asset managers now factor climate change into their investment decisions. In a survey of asset managers with $14 trillion in assets, 53% said that climate change data drove their decisions on whether to divest or not invest in listed equities. That figure was up from 23% in 2012, and just 9% in 2011. Over two in three asset owners (69%) added that climate change data had already influenced their fund manager decisions in 2012.

Let’s come back to high value fixed assets for a moment. We’ve already touched on some of challenges utilities, energy providers and mining face, but there are other important aspects to consider too. For example, it is risky to construct new plants or facilities based on today’s risk levels, not the higher levels that future decades will bring. Doing that would mean risking your investment capital, in part or in full.

For the first time, the IPCC report says there is a ceiling (carbon budget) for our global use of fossil fuels. To have a 66% chance of keeping global warming below 2°C, the carbon budget is 800 gigatonnes. Roughly two-thirds of this carbon budget has already been used up in fossil fuel emissions. So the longer governments take to implement effective emissions-reducing policies, the tougher those policies will need to be – and the greater their impact will be on energy companies and the whole economy. As research by HSBC and Standard and Poor’s shows, stricter emissions-reducing policies would have a direct negative impact on the creditworthiness and market capitalisation of energy companies. Yet so far, capital markets have not registered this massive risk across the board. Some investors are starting to ask questions about such risks. It is notable that 80 senior representatives from pension funds recently met to examine how to foster longer horizon thinking and acting in financial markets – including the risk of much stricter climate change policies.

What are the implications of climate change for the financial sector?
If governments do not implement policies that sufficiently reduce GHG emissions, this could reduce economic growth and increase volatility. A strict cap on greenhouse gas emissions is one way to avert this scenario.
Two factors are becoming more important: an active approach to risk management, and society’s perceptions of transactions. Research shows that companies with good sustainability management strategies have a significantly lower cost of debt. A recent report showed that companies with the best climate change management strategies have higher levels of profitability and cash flow stability, and higher dividend growth for investors.

More and more potential investors now consider companies’ sustainability risk management as part of their investment decisions. Sustainability rating used by investors are starting to ask questions about whether banks’ own lending and financing leads to higher greenhouse gas emissions. Over the next two years, the financial sector will develop new tools to measure the emissions that arise from bank business activities.

Financial institutions can also help society and their clients to invest in forward-looking environmental technology. According to estimates, the switch to a greener economy will require annual investments of $1 trillion – a significant business opportunity.

Climate change in Asset Management

53%

of the Asset Managers say that climate change data drives their decisions on whether or not to invest in listed equities

Why should this report be taken seriously?
There are several reasons. Firstly, the report is based on evidence from numerous independent sources, more and better observations, and an improved understanding of the climate system, including much better modelling technology. Secondly, IPCC reports undergo an exhaustive four-stage review process that resembles a financial audit. Scientific confidence in the conclusions of the IPCC reports has significantly improved since the last publication in 2007.

Even if we cannot be 100% certain of the causes and effects of climate change, policies and investments to reduce emissions clearly make sense for societal and business risk management. Put simply, would you get on a plane that had a significant risk of crashing?

How will this report be used?
This report will help to shape government policies on climate change. However, it sets no specific targets for emissions reductions and does not address issues of financial or political feasibility. The IPCC report simply assesses the implications of different levels of carbon emissions. So the real responsibility lies with the policymakers who draw on its findings to set policies such as the EU 2030 emission reduction target.

The report also provides a starting point for a new international commission made up of government, finance and business leaders from 14 different countries. The commission will analyse the economic costs – and of course the benefits – of acting on climate change, and is chaired by Felipe Calderón, the former President of Mexico.

When the initiative was announced, Lord Nicholas Stern (vice-chair of the commission and author of the 2006 Stern Review) again pointed out how serious the situation is. “Many economic models grossly underestimate the risks of climate change. Temperature rises of 3°C or 4°C above pre-industrial levels by 2100 would put humans way outside the conditions in which civilization developed, and could cause major disruptions that would damage growth.”

The commission will publish its analysis in September 2014, one year before the culmination of negotiations for a new international climate agreement in Paris in 2015.

The second volume of the IPCC report is due for publication in March 2014, and will examine the impacts and risks from climate change for the economy. An updated analysis will be published one month later and will present the various options for preventing, or at least reducing, greenhouse gas emissions.




As Deutsche Bank’s Group Sustainability Officer, Sabine Miltner has been focused on embedding sustainability in the Bank’s core business by managing the environmental and social risks associated with clients and transactions as well as promoting sustainability-oriented business opportunities. As Deputy Chair of the Bank’s Environmental Steering Committee, she has coordinated the Bank’s business strategy around climate change.
Before joining Deutsche Bank, Ms. Miltner headed the Emerging Markets Policy Department at the Institute of International Finance (IIF), the global association of financial institutions, in Washington DC. She started her career as an economist at the International Monetary Fund after graduating from Harvard University with a Ph.D. in economics. Ms. Miltner was born and raised in Germany.

Significant business opportunities

1 trillion Dollars

of annual investments in infrastructure will be required for the switch to a greener economy

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