A recent IFoA workshop found that climate models significantly miscalculate risks when they ignore biodiversity impacts. This blog from the Biodiversity Working Party explores these critical insights and the implications for actuaries.
“If you've done six impossible things this morning, why not round it off by quantifying the impact of biodiversity scenarios and addressing a major gap in climate models?”
The major takeaway from the recent IFoA biodiversity scenarios workshop is that using climate scenarios without explicitly considering biodiversity impacts leads to significantly inaccurate conclusions. This is a critical issue. It challenges the assumptions of leading scenario efforts such as the Network for Greening the Financial System (NGFS), International Energy Agency (IEA) and similar ones.
The workshop also emphasised the importance of biodiversity considerations in actuarial work. This is especially around the challenges and limitations of using climate change scenarios, noted in the IFoA’s risk alert on climate change scenario analysis.
A 2024 report by the Environmental Change Institute and Green Finance Institute (ECI/GFI) found that nature-related risks may be as damaging to the UK economy as climate risks over the next 10 years. It could cause a:
These findings prompted the development of this workshop, bringing together more than 20 leading sustainability and risk modelling actuaries and academics.
Its goal was to explore the role of biodiversity where explicitly incorporated in published financial scenarios. Then to compare these to widely used climate scenarios, particularly those from the NGFS.
This blog presents the key insights and initial conclusions, providing a basis for more detailed discussions. The workshop found that it is critical to explore the:
Models are useful tools for exploring the world as it currently is and exploring potential options for future states. Scenario analysis is a helpful tool for understanding the impact of various pathways to different future states.
A 2024 UK Centre of Greening Finance and Investment report provides a helpful overview of different model structures in climate-scenario modelling. It illustrates the breadth and series of decisions and assumptions underpinning published climate models.
Our review of the available biodiversity scenarios brought the model structure and scenario philosophies to the fore. We found:
In contrast, the NGFS’s climate scenarios predominantly use a shadow carbon price to reflect economic preferences and the economy’s transition within a given carbon budget. While this enables more granular calibrations on countries and industries, extending this to include biodiversity objectives alongside emissions may be more challenging.
These reflections highlighted the tensions between creating useful narrative scenarios and practical Monte-Carlo-style scenario generators. The ECI/GFI work highlighted the challenges of discovering plausible narrative scenarios and translating the biodiversity impacts into economic and financial impacts.
Developing narrative approaches depends on complementing them with rigorous modelling. The narratives need to be translated into plausible assumptions about future rates of economic growth, warming trajectories, and future policy responses to climate and nature risk. From a design perspective, the level of detail or disaggregation within a model influences a given model’s focus, insights, and decision-making utility. There is a balance to be struck between the granular details in those designed for local (country/regional impacts) and the broader ones that would apply at a more global level.
Timescale is also a critical factor. The ECI/GFI focuses on a 10-year horizon (2025 to 2035), which is likely to be the most influential from a financial services point of view. The ability to generate realistic, plausible narratives on longer-term timescales becomes increasingly difficult and questionable.
These challenges include tipping points, social factors and importance of food systems.
Current approaches to modelling biodiversity risk face several challenges. Similar to climate scenarios, existing models often fail to fully capture the dynamics and complexity of nature risks. While narrative scenarios can capture potential tipping points, such as the ECI/GFI pandemic scenario, this is challenging within more quantitative forecast approaches.
Biodiversity measurement comes with additional challenges as we do not have an equivalent metric to carbon for biodiversity loss. It is easier to measure greenhouse gas emissions released in the atmosphere than to wade in the rainforest and count species of frogs. A multiplicity of metrics makes modelling and ultimate decision-making much more difficult.
The spatial nature of biodiversity adds further challenges. These include the discrepancy between tackling local issues granularly and the global scale of action required to address the biodiversity crisis meaningfully.
And finally, it is difficult to articulate what success looks like. Unlike climate, where the elimination of net greenhouse gas emissions can be taken as a direct goal, the exact manner and measure of policy outcomes for biodiversity and nature is not clear. At best, we may see an emergence of local strategies for the global policy goal, but this is neither imminent nor are its consequences easily apparent.
Land use and food systems were two more significant gaps in current climate scenario modelling. Some of the climate models allow for reducing deforestation requirements, and some behavioural shifts. But full impacts on the food system and agricultural shifts typically do not feature significantly in these models.
Specific examples and interactions include:
Impact on financial and economic models: Lower agricultural yields due to climate change or pollinator population collapse:
Narrative description: Food shortages could lead to economic instability, forced migration, and even geopolitical conflicts over arable land.
Impact on financial and economic models: Lower carbon absorption from plant-based carbon sinks amplifies climate and weather risk events, increasing regulatory costs (for example carbon taxes) and insurance losses, disrupting economic activity, and harming health.
Narrative description: Climate change accelerates, leading to more frequent and severe weather events, affecting infrastructure, insured assets, and economic stability.
Impact on financial and economic models: Damage to fauna- and flora-related flood and weather defences, such as forest collapse, results in unexpected droughts, flooding, wind damage, wildfires and land degradation. This in turn disrupts economic sectors and human quality of life reliant on stable land and water conditions in that area (for example agriculture, real estate, and insurance).
Narrative description: The natural balance of water retention, soil stability, and other ‘ecosystem services’ is disrupted, making land less viable for people to live, work, and grow food.
These examples highlight the need to incorporate chronic and acute biodiversity impacts on macroeconomic factors and their increased volatility.
A more granular consideration of land-use requirements highlights the intersectional impacts – the simultaneous need for:
This leads to more modest expectations for the growth of bioenergy and a greater focus on:
When faced with the challenges of understanding the impacts of the sustainability transition, actuaries must confront the ‘Einsteinian razor’ of striving to reflect a simple reality without oversimplifying it. In grappling with the difficulties of climate scenarios, the necessity of including biodiversity appears to be a rather inconvenient truth. Yet we recognise that it has a material impact. Ignoring it would be tantamount to discarding the materiality of the global financial crisis or COVID events.
Our first conclusion is that biodiversity impacts need to be considered. Where possible, actuaries should incorporate biodiversity into their climate scenario analysis. This provides some additional challenges. Where integrated approaches are not available, actuaries need to be aware of the implications of the challenges and limitations in existing published scenarios.
Looking forward, actuaries will need to upskill their capabilities and approaches. They should:
The workshop highlighted the need for greater engagement with narrative approaches to embrace and explain the complexity of risks. There is also a deep need to develop a better understanding of risks’ direct impacts including potential volatility spikes, feedback loops, and broader tipping points. This complexity and these interconnections mean that actuaries will need to embrace a broader array of systems-thinking and complex risk analysis tools to understand, navigate and quantify these risks.
We will be developing further articles and a full report to outline the full insights from the workshop over the next few months.
