Here we set out what climate change means for the actuarial profession, including the risks and opportunities.
Global warming is occurring at an unprecedented rate as a result of human activity. This change presents ecological, social, economic and financial risks. The potential impacts of climate change are global and systemic. As well as highly disruptive physical changes, there are significant implications for the entire financial system.
The World Economic Forum’s (WEF) annual Global Risks Report for 2021 has shown that climate change and failure to act upon it rank as the most pressing concerns for leaders globally. The pressure is on for government, industry, and companies alike, to play their part in accelerating the transition to a more sustainable future.
However, it’s not as simple as cutting carbon emissions. There are increasing calls for a just and fair transition. One which aims to extend the economic and social benefits of sustainable energy globally, including economies that are currently reliant on carbon-intensive activities.
As a result of this increased pressure, sustainability risks, including the risks of climate change and biodiversity loss, have never been higher on the agenda. Increasingly ambitious sustainability targets are being set, with many private and public sector organisations, including the Institute and Faculty of Actuaries, committing to net zero by 2030.
These commitments are just the beginning – meaningful action is urgently required to effect real change. Transformative change will require organisations to fundamentally rethink how they operate and transition to sustainable business models. As a profession specialising in risk management, the actuarial profession is ideally placed to assist others in understanding and integrating the financial risks of climate change.
“Sustainability is undoubtedly a theme of developing profile and importance and will permeate all aspects of business life,” says Russell Picot, former Group Chief Accounting Officer at HSBC and a special adviser to the Financial Stability Board’s Climate-related Financial Disclosures Task Force. “It’s important that all financial professionals, including actuaries and accountants, have a sound grasp of what this means and how it will impact the business and investment environment in which they operate.”
As climate change and biodiversity loss are new threats, traditional methods can’t necessarily provide the insight that businesses are looking for.
“The fundamental question for actuaries, their employers, and their clients, is whether or not they are pricing risk correctly if they don’t include climate change in their modelling,” says Sandy Trust, Director of Sustainable Finance at E&Y and Chair of the IFoA’s Sustainability Board. That’s why Trust believes that in order for actuaries to be able to fulfill the demands that will be made of them, they need to adapt.
“If they want to continue to price risk accurately, they need to adapt their actuarial toolkit to take account of everything happening and that is where the profession comes in. If they don’t, they could not only be placing their organisation at a competitive disadvantage, they could be putting the organisation itself at risk,” he says.
The IFoA has placed a great deal of emphasis on sustainability considerations, working with the IFoA Sustainability Board to establish a Sustainability Volunteer Group and a Sustainable Finance Community. It has also issued a wide range of guides and support to help actuaries speak up about climate change and support their organisations in tackling its impact.
As far back as 2017, the IFoA issued a Climate Change Risk Alert to all members encouraging them to consider how climate change affects the way they work and come to decisions. These are not new considerations.
“An actuary needs to be progressive, forward-thinking, and leading on this rather than sitting back and waiting for the regulator to do something,” says Trust. “There is a professional and moral responsibility to be literate in this way. Look at the Royal Charter – there is a public duty of care around actuarial matters – so if climate change is impacting actuarial matters, then for me it becomes part of that duty of care.”
Beyond the duty of care, failing to incorporate sustainability considerations into their advice could see individual actuaries facing legal challenges in the future.
“The risks to the profession come in two parts,” says Louise Pryor, President of the IFoA. “The first is that this is a major, long-term financial risk – which is what actuaries model so they have to take it seriously. But secondly, by not acting, they could lose all credibility. There is a real risk of being accused of professional negligence. We are seeing a huge rise in climate-related lawsuits around the world and one of the groups that could get sued for not giving strong enough advice on sustainability issues is professional advisers.”
For Trust, it is vital that actuaries take advantage of the support and guidance offered by the IFoA, enhance their skills and develop their toolkit to provide the insight that their employers are looking for. He points to scenario analysis - understanding what could happen to the value of physical assets as extreme weather events increase in severity and regularity and sea levels rise - as one of these tools.
“It’s about thinking through the ways climate change can impact your financial decisions and the outcomes for your pension portfolio, annuity book, and the entity you work for. There is lots of sophisticated analysis that allows you to look into different climate scenarios,” he says.
The need for actuaries to engage on climate change and bring their skills to play in the response to is vital. And Trust believes there is an opportunity for the profession to carve out an ever-more crucial niche for themselves.
The impetus for actuaries to react goes beyond moral or professional obligations. Operational pressures are likely to start bearing down, with an expectation from boards that they are conversant in these issues and have the skills to respond.
Emily Farnworth is co-director at the Centre for Climate Engagement at the University of Cambridge, an organisation that acts as a bridge between the academic research on climate science and the country’s boardrooms.
She says that business appetite to learn about sustainability is increasing and points to the growing number of financial institutions making sustainability promises as evidence of that burgeoning awareness. And as more and more board members become au fait with the nature of the crisis and what their response to it should be, the demand for support and engagement throughout the company will increase, with much of that attention falling on actuaries.
“Actuaries should grasp the opportunities that sustainability represents to ensure that they continue to be relevant to their clients,” says Picot. “For example, in the area of investment strategy, a considerable amount of thinking is happening already about the design of strategies where this knowledge is critical. Without this, there is a risk that other professionals will step into the space.”
And now that the commitments have been made, there is a natural pressure to start delivering on those promises. There is nowhere to hide anymore, for anyone.
“The board can set the ambition, but it is going to require employees to come up with and deliver the solutions. There is going to be an increasing openness from the board to hear from employees about what needs to be done,” says Farnworth.
But it’s not all about managing expectations – there are huge opportunities for the profession if individuals are willing to grab them.
While nobody has a cut-and-dried answer on how to shift to a sustainable economy, actuaries have a crucial role to play in promoting the understanding and integration of climate risks and opportunities within decision-making. Indeed, the opportunities for actuaries go beyond advice. Actuaries could channel their unique expertise into providing much greater support for dealing with sustainability risks. By developing products and services that support and incentivise behavior and activities that are aligned with net-zero, the financial sector can be a driver of the change that is needed. Products and services can also support individuals and businesses as they navigate the changing risk landscape, helping society to adapt.
“There are all sorts of opportunities in financial services and more broadly because these risks are quite different than others. Most insurable risks happen over and over again but climate change and biodiversity loss happen once, and it is chronic and long-lasting,” says Pryor. “But the data doesn’t exist, so you need different techniques and that creates a huge opportunity for actuaries to step in and think about how we do it.”
It feels as though we are at an inflection point – progress is being made but the real test comes now when action is required, and actuaries are shaping up to have a key role to play. But to fulfill that role, actuaries will need to show a willingness to reach out beyond their traditional skill sets and resources and create new approaches that can give their organisations the insight they need.
