Actuaries are calling for more realistic climate risk assessments which should include the ‘risk of ruin’ — the point past which global society can no longer adapt to climate change.
A report from the Institute and Faculty of Actuaries (IFoA) and the University of Exeter is advocating for “worst case scenario” thinking about climate change as part of a standard risk management assessments.
The report ‘Climate Scorpion: the sting is in the tail’ warns that global heating could be accelerating. Breaching the 1.5°C goal appears increasingly likely, with the world having temporarily passed this threshold last year. It said this could trigger multiple tipping points, such as the collapse of the Greenland ice sheets, with potentially irreversible effects.
The climate could be more sensitive than expected. While often referred to as a ‘tail-risk’ the probability of significant temperature rise may be surprisingly large. New approaches are suggesting that doubling greenhouse gas concentrations could result in a 7°C or more temperature rise.
‘Climate Scorpion’ surveys the latest knowledge about extreme climate risks and outlines how actuarial thinking around these risks can inform policymakers.
The report introduces the idea of ‘Planetary Solvency’, that is an assessment of the different ecological threats, including those beyond climate change, to determine the risk of planetary ruin.
IoFA council member and lead author of the report Sandy Trust says: “There is an urgent need to provide policymakers with realistic assessments of climate risk, to support decisive policy action to accelerate the energy transition. Alongside clarity on the risks, we need to invest in educating policymakers and the public on positive tipping points and behavioural change to support a more rapid transition.
“As actuaries, we have a responsibility to play an active role in addressing the sustainability challenge. Our long-term thinking, financial system understanding, risk management mindset and probabilistic reasoning combine powerfully to complement climate science and communicate risks clearly to regulators and policymakers.”
The report comes after criticism last year that many of the assessments made by pension funds and other financial institutions were using outdated climate models that did not take into account the wider consequences of unchecked climate change.
As part of their TCFD requirement pension funds have to use forward-looking metrics which assess how portfolios should perform under different climate change scenarios.
These data is shown alongside metrics that indicate the current greenhouse gas and carbon emissions associated with pension fund portfolios. For the first time Corporate Adviser has collated these metrics on the carbon footprint of leading workplace pension schemes in its ESG in DC Pensions report.
CLICK HERE TO DOWNLOAD A COPY OF THE ESG IN DC PENSIONS REPORT
The climate scientists involved in the IFoA and University of Exeter report stressed the importance address the problem of climate change.
Professor Johan Rockstrom, director Potsdam Institute Climate Impact Research says: “This report shows how important it is for us to collaborate across disciplines on climate change. It re-emphasises how important it is to treat 1.5°C as a physical limit and not a political target, recognizing the risk from tipping points. Four of these are showing scientific evidence of now being at risk already at 1.5°C, really putting humanity’s future at risk. This is a planetary crisis which we must address with co-ordinated policy action to accelerate the energy transition.”
Professor Tim Lenton, from the University of Exeter, said: “This report puts forward the case for why and how the actuarial approach can be used for climate change. It compellingly argues that we should view climate risk as a problem of ‘Planetary Solvency’, understanding and managing risks to the long-term survival of global society. In short, we need to have a best guess about the worst-case and make policy on that basis.”