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It’s not all bad news: Climate-related risks and opportunities

The UN Intergovernmental Panel on Climate Change released a report last month warning that there is a very real risk that global warming could reach 1.5 degrees Celsius by as early as 2030. This poses significant risk to health, livelihood, food security, water supply, human security, and economic growth. Louise Pryor, Chair of IFoA’s Resource and Environment Board, examines how climate-related risk is directly relevant to the work of actuaries. Louise Pryor

Climate risk is becoming increasingly mainstream. For some years it was only tree-hugging lentil-eaters who took it seriously, but nowadays it appears to be a major concern for bodies such as the Bank of England and the Pensions Regulator in the UK, and the Financial Stability Board of the G20 in the global arena. These bodies aren’t worried because it may affect their summer holiday plans, but because they anticipate major long-term financial impacts as a result of climate change and as a result of efforts to slow climate change down.

And these long-term financial impacts are directly relevant to much of the work actuaries do. For instance, how will climate change affect the long-term investment returns that are needed in order to deliver adequate retirement provision to members of occupational pension schemes? What effect might it have on mortality and sickness rates? And how might it impact on the business model of employers, and their ability to support the pension schemes they sponsor?

That’s why in May 2017 the IFoA issued a risk alert on climate-related risks, which reminds us all that we should understand (and communicate clearly) the extent to which we have taken climate-related risks into account. We recognise the actuaries aren’t necessarily experts on climate change, so the Resource and Environment Board is issuing a series of Practical Guides to help actuaries consider climate-related risk in their work.

And, in my view, it’s getting increasingly difficult to ignore them. The House of Commons’s Environmental Audit Committee recently highlighted a poor understanding of climate risk among some of the UK’s largest pension schemes. We have seen a member of an Australian superannuation fund take his fund to court because it has not provided information about the impact of climate change on his investments and what it is doing about it and environmental lawyers, ClientEarth, have warned a number of UK pension schemes about the possibility of similar actions in the UK.

It’s not all bad news, though – there are both risks and opportunities for actuaries in this space. The risks are obvious – if we are ignoring climate-related risks, will we be blamed when things go wrong? As a profession, we must make sure that we don’t get a reputation for always being slow to recognise changes in the risk landscape, as we were with mortality improvements twenty years ago.

But the opportunities are potentially much greater. After all, we are good at analysing and reporting on risk – it’s pretty much our bread and butter. And there’s going to be much more analysis and reporting of climate-related risk, for pension funds as well as for asset managers and listed companies, if the recommendations of the TCFD are adopted widely.

What’s the TCFD? It’s the Task force on Climate-related Financial Disclosures, which was set up by the Financial Stability Board and was led by Michael Bloomberg. Its recommendations are aimed at helping companies disclose decision-useful information. This will enable financial markets to better understand climate-related risks and opportunities. It’s likely that there will be increasing pressure from investors and stakeholders on institutions to comply with the recommendations.

So do please go and read the Risk Alert on climate-related risks, and think about how they might affect the work you do. Look out for the Practical Guides for Actuaries which are full of useful information. And also think about possible opportunities – how can you take advantage of the increasing drive towards transparency around climate risks?

There will be a number of sessions focused on climate risk at the upcoming General Insurance Research Organising Committee (GIRO) Conference (23-26 October 2018).

Thursday 25 October 2018

  • Hot Topics: Climate Change presented by Mark Rothwell, Carol Storey and Patrick Cleary
  • Workshop D3: Climate Change: A Practical Guide by GI Practitioners presented by Mark Rothwell and Jian Siew

Friday 26 October 2018

  • Workshop E10: Shame! Half the Room Hadn't Heard of our Climate Change Risk Alert presented by Mike Clark
  • Workshop F3: Climate Change: A Survival Guide Climate Change Working Party presented by Carol Storey