10 August 2020
Simon Jones (immediate past chair of the R&E Board) blogs on sustainability and why actuaries need to change their mindset to change the world.
Actuaries have been addressing sustainability issues for years. The Resource & Environment Board was established back in 2013 with a goal of building engagement by actuaries in understanding, and then in addressing, the risks and uncertainties for economic and financial systems arising from sustainability issues.
The Board serves actuaries at different levels, from those who need to understand how issues such as climate change relate to their day-to-day activity to those working in specialist sustainability fields. Whilst it may once have been surprising, a small but growing number of individuals within our profession could legitimately call themselves climate change or sustainability actuaries.
Before thinking about the role that actuaries can play, we need to step back and understand the nature of the issues that we are trying to address. The word “sustainability” is bandied around as a catch-all term, but few give it sufficiently detailed thought. Over 30 years ago the Brundtland Report defined sustainable as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”. This highlights the importance of intergenerational fairness, of not overly discounting the future, and presents the first challenge for actuaries who want to occupy this space.
I would posit that most actuaries don’t envisage a world in which the limits implied by the definition of sustainability actually start to bite, particularly in our long-term models, yet these are the challenges that we are being asked to address. For example, if we look at the top two hotspots in the Risk Perspective[1] recently published by the Joint Forum on Actuarial Regulation, we find climate change and systemic risk. These two challenges have sustainability at their heart, yet actuaries have not been systematically trained on how to embed these considerations into their advice.
It is important to acknowledge that we have many of the skills necessary to address these evolving issues although we need to continue to evolve these skills and the toolkits that we have at our disposal. Taking a step further, we also need actuaries with the courage to challenge the unsustainable norms that surround us and use their collective voice to highlight the need for systemic change.
Perhaps the key distinguishing feature of the actuary’s skillset is to be able to deal with future uncertainties. Yet tools and methodologies that do not acknowledge limits cannot adequately describe this future, obscuring the very uncertainties that are critical in the exercise of an actuary’s judgements. For example, we are seeing a changing physical risk environment as the planet warms whilst we simultaneously undergo an energy transition. Models which are calibrated to historic economic patterns ignore these systemic changes and are unlikely to adequately represent the current risk environment.
Continuing without change may lead actuaries to be too narrow in their consideration of risks, to be overconfident in their advice and to think too little of the uncertainties. For actuaries to be truly able to consider issues of sustainability, there are three areas where our skills and understanding must therefore evolve:
- The first lies in recognising there are many schools of economic thought. Actuaries have been tied into thinking driven by neo-classical economics which ignores the concept of limits. Our thinking increasingly needs to consider ideas present in ecological and behavioural economics, recognising planetary and societal constraints that have been popularised by concepts such as Doughnut Economics[2], and accepting that not all risks can be priced.
- Second is to understand that we operate within complex systems and need to embrace systems thinking[3], a holistic discipline that seeks to understand the linkages between actors in a system. Climate change is a great example of this as the interactions between society, the environment, policy markets and technology will ultimately determine the path we follow and the outcomes, both financial and non-financial, that will arise. Yet even within this, the path is non-linear given the potential for negative feedbacks to emerge. Actuaries need to have the skills to identify the systemic framework that underpins their modelling and be able to use a systems perspective to inform their judgment and develop their advice.
- Third is to build out our understanding of broader sustainability issues. There has rightly been a focus on climate change in recent years, yet climate is one of 17 UN Sustainable Development Goals. Knowledge of these goals, the manner in which they are interconnected and the ability to work with and within these frameworks will be essential.
We not only need to make these issues part of our mainstream educational syllabus if we are to train actuaries who are able to address the complex challenges of sustainability, but also encourage existing actuaries to upskill themselves. This will allow actuaries to work out where those skills may be relevant in their current roles whilst also opening doors to new domains of work.
A key challenge is to recognise that the circumstances we are likely to be working within will inevitably change. Covid-19 and the response to it has highlighted the speed at which that change can take place, in addition to illustrating the relevance of ecological limits and complex systems. Whilst our training can take us so far, we need actuaries to be prepared to take a step further and recognise that the arena within which we typically provide advice – finance – has a purpose beyond the financial system, it doesn’t just serve itself, as illustrated by the growing push-back against the notion of shareholder primacy[4].
Upskilling actuaries on issues of sustainability should be regarded as having a bilateral benefit: we make actuaries aware of how their work and advice may be impacted, but we equally make actuaries relevant to the world of sustainability and how finance can deliver positive social and environmental outcomes. Actuaries can, and indeed must, play a role in delivering a better future because, if we choose not to, we run the risk of becoming irrelevant.
Actuaries already contribute to and advise on issues of sustainability in many fields. In the UK, we see actuaries working within climate risk modelling, sustainable finance and impact investment. But there are clearly more domains in which we can operate and contribute.
Could we see actuaries working in fields such agriculture, water resource management and developing sustainable cities? Why not? All require a long-term outlook; all require the exercise of judgement; all can make use of modelling; and all interact with the financial system in some way. We need to be bold and make ourselves relevant to the problems that need to be solved.