Climate change is one of the few major policy issues that has continued to rise up the political agenda and hit the headlines despite the dominance of Brexit. This spring we saw groups of activists take to the streets in London for a fortnight to demand that the government and financial sector take more decisive action on climate change. In the same week that Extinction Rebellion occupied Waterloo Bridge, the UK Government joined other governments and cities worldwide by declaring a climate emergency. Meanwhile, the Committee on Climate Change has recommended that the UK should aim for net-zero greenhouse gas emissions by 2050, and pointed out that current policy would be insufficient to achieve this; Mark Carney, Governor of the Bank of England, has delivered a speech to the European Commission updating his famous ‘Tragedy of the Horizon’ speech to speak of the ‘New Horizon’ where the building blocks for a transition to a low-carbon economy are being put in place; and the Network for Greening the Financial System has released its first report about climate change as a source of financial risk, entitled ‘a call for action’.
There’s action on the regulatory front, too. The Department for Work and Pensions and the Pensions Regulator have recently strengthened their expectations on fiduciaries relating to climate risk, while the Financial Conduct Authority and Prudential Regulation Authority (PRA) are encouraging insurers to disclose more information about their exposure to climate risk. The work of legislators and regulators, both here in the UK and across the world, is accelerating the shift towards a low carbon economy. This shift will affect insurers and pension funds –the employers and clients of actuaries – as they respond to the changes in legislation and regulation that are designed to encourage the transition from an intensive to a low carbon economy. It is important that this transition is effectively managed as, like the effects of climate change itself, it will not affect all people equally. If society does not respond to climate change, we risk the long-term sustainability of our familiar world. There are likely to be both winners and losers in both the short and long terms, and if governments, regulators and the financial sector do not work together to develop appropriate adaptation and mitigation strategies the societal effects could be drastic and financial stability undermined.
Against this background, the Institute and Faculty of Actuaries (IFoA) believes that actuaries, alongside other professionals, should help ensure that their clients and employers are aware of the risks posed by both climate change itself and from changes in legislation and regulation.Our reputation is likely to be adversely affected if we don’t respond to the risks posed by climate change. Client Earth and the Principles for Responsible Investment have already undertaken studies on the role they believe actuaries advising pension schemes and investment consultants (many of whom are actuaries) should play in assessing the materiality of climate change, and are urging actuaries to take climate risks into account in any relevant decisions, calculations or advice. Not doing so is likely to invite criticism from these bodies as well as from our stakeholders more generally.
“Now is our chance to prove that actuaries are long-term strategic thinkers, able to look at one of the most high-profile policy challenges of our time through an analytical lens and apply a systems-based approach.”
To help actuaries address these new challenges, the IFoA is producing a series of practical guides which examine the main implications of climate change for actuaries working in different fields – those issued so far cover topics ranging from setting financial and mortality assumptions to assessing sponsor covenant, as well as more general issues. There are opportunities for actuaries, too: robust scenario analysis is a vital tool in managing the transition to a low carbon economy for both governments and businesses.
Worryingly, in April this year, just before the recent spate of activist activity, the PRA stated that “few firms are taking a strategic approach that considers how actions today affect future financial risks”.
Now is our chance to prove that actuaries are long-term strategic thinkers, able to look at one of the most high-profile policy challenges of our time through an analytical lens and apply a systems-based approach. Actuaries, working with others in multi-disciplinary teams, can play a crucial role in protecting our planet for generations to come, without placing an undue burden on any one generation alive today.
We have an opportunity to leave the world in a better state than we found it. We should seize it enthusiastically – if we don’t, there is a risk that those worst affected will ask us why we didn’t do more and hold us to account.
Louise Pryor is Chair of the Institute and Faculty of Actuaries’ Resource and Environment Board.