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Risk management approach essential to respond to climate change risks

  • Risk management should be a central aspect of climate policy to avoid extreme global temperature rises and reduce uncertainty
  • Early action is essential to improve future options to deal with climate change
  • Climate change will have long-term consequences. Policy and investment decisions need to consider the impact on future generations

Climate change is one of the biggest threats that society faces. The risks associated with climate change are wide-ranging and could have major economic, political, social and financial impacts. The Institute and Faculty of Actuaries (IFoA) is deeply concerned by these issues and supports efforts by Governments at the UN Climate Change Conference (COP21) next week to address climate risks.

IFoA today published a report that calls for a risk management approach to be a central component of climate policy if we are to deal with the considerable uncertainty associated with climate change.  Based on the work of climate scientists and climate policy experts, and actuaries’ expertise in managing risk and uncertainty, the report concludes that:

  1. Climate change is a risk management problem – current climate policy is based on an understanding of what is expect to occur, when in fact future temperatures could be more extreme. If society is to understand and avoid a worst case scenario, the scale and impact of extreme scenarios should be a prominent element in climate policy.
  2. The cost of delay is high and early action on emissions will improve future options – failure to take timely action on emissions is likely to lead to more costly and disruptive remedial action at a later date, as well as earlier and more severe climate impacts.
  3. Continuous assessment and dynamic management should be central aspects of climate policy – there is considerable uncertainty about the precise nature and timing of climate change impacts and how they will affect the population.  The Intergovernmental Panel on Climate Change’s (IPCC) 2°C-consistent carbon budget is not guaranteed to achieve its goal; it only has a 2/3rds chance of limiting temperature rises to 2°C.  Governments need to ensure that climate risk is continually assessed to reduce uncertainty and new information and insights are used to inform policy responses.    
  4. Action is needed to address market failures - governments also need to recognise their role in correcting market failures, for example by pricing the negative effects of greenhouse gas emissions. Effective policies for pricing carbon, and for compulsory and standardised disclosure of climate risks, will allow markets to rationally and systematically respond to climate change.
  5. Policymakers and financial institutions need to balance multiple timeframes – current approaches to policy and investment decisions tend to place a high value on the short-term, potentially at the expense of future generations. Both policymakers and financial institutions need to consider the time horizons on which they are basing decisions and how their decisions may affect people now and in the future. 

Nico Aspinall, Chair of the IFoA’s Resource and Environment Board comments,

“The IFoA recognises the serious risk that climate change poses to society. The actuarial profession is committed to working with governments, business and other stakeholders to help better understand the long term consequences of climate change, and help develop policy options to respond to these risks.

“The effects of climate change are already being felt on a global scale. Without early action, climate change will continue to be disruptive in the first half of this century and has the potential to become catastrophic in the second half.

“COP21 is a critical step towards mitigating the risk that climate change poses. However, governments and businesses need to move away from short term thinking and make sure policy and investment decisions take account of future generations.  Our report concludes that continuous assessment and dynamic management as part of a proper risk management approach to climate change should be adopted as central aspects of climate policy.  This will help ensure risks are identified in good time to properly plan for any disruption and economic and social costs in the future.”

~ENDS~

A full copy of the report can be downloaded here

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