The Institute and Faculty of Actuaries (IFoA) has been involved in climate change for a number of years and has increased its commitment and effort in this area.
In April 2022, the IFoA published a risk alert to remind its members that climate change and sustainability issues have gained increased global importance and focus in recent years; and are likely to represent a material financial risk to future economic and market conditions. As actuaries provide advice to financial institutions, it requested members to appropriately consider and communicate clearly, the impact of climate change and sustainability issues or risks within their actuarial work. The document refers to a previous risk alert published in 2017, which required members to consider and understand the impact of climate-related risks and the extent to which they have considered them in any relevant decisions, calculations or advice.
In January 2021, the IFoA issued a climate change statement, which acknowledged the risks posed to the world from climate changes, and outlined the IFoA’s strategy and overall action plan in this area. This included becoming a signatory to the Green Finance Charter and supporting global initiatives such as the Paris Agreement, the FSB’s Task Force on Climate-Related Financial Disclosures, the UN’s Principles for Responsible Investment, and the UN’s Principles for Sustainable Insurance.
Moreover, the IFoA has a climate change curated library which contains an extensive repository of climate related topics of interest to the profession.
This paper published by the International Association of Insurance Supervisors outlines how climate-related risks in the insurance sector should be supervised. Insurance solutions can provide a number of solutions to the risks posed from climate change by:
i. mitigating the effects of extreme weather events.
ii. complementing and strengthening other climate change efforts
iii. improving CAT insurance solutions to provide protection to the most vulnerable of climate change.
The paper titled: “Climate change and mortality” published by the International Actuarial Association assesses the impact of climate change on the world’s population mortality rates and focuses on insured persons and pension plan participants. It outlines the role played by actuaries and how quantitative analysis and scenario modelling can be used to understand the effects of climate-induced changes.
The paper by Gatzert, Reichel and Zitzman outlines the sustainability risks and opportunities on both an insurance company’s assets and liabilities side of the balance sheet.
In the United Kingdom, the prudential regulator in 2019 published its expectation for banks and insurers to respond to financial risks from climate change, set out in Supervisory Statement 3/19. The prudential regulator’s expectations relate to governance, risk management, scenario analysis and disclosures. A letter from Sam Woods to all Chief Executive Officers titled: “Managing climate-related financial risk” built on the expectations set out in Supervisory Statement 3/19, provides observations on good practice, and sets out next steps for implementation. Insurers and reinsurers were expected to have fully embedded their approaches to managing climate-related financial risks by the end of 2021.
Scenario analysis is a useful way for actuaries to explore “what if?” questions about the different possible future pathways. This can be helpful when considering very different alternatives such as a world with reducing greenhouse gas emissions (hence a rapid transition in society and the economy) and a world with rising emissions (hence a lot of physical risk such as more intense and frequent storms). The following are example of climate related scenarios:
- The Network for Greening the Financial System (NGFS), a group of central banks and supervisors partnered with an expert group of climate scientists and economists to design a set of hypothetical scenarios. The NGFS climate scenarios explore a range of plausible outcomes. They aim to provide a common reference point for understanding how climate change (physical risk), and climate policy and technology trends (transition risk) could evolve in the future.
- In the United Kingdom, the Bank of England launched a Climate Biennial Exploratory Scenario (CBES) to explore the risks presented by climate change on banks and insurers. The CBES explores three different climate policy scenarios, (early action, late action and no additional action) which generate a range of possible future outcomes for global temperatures and the economy, each spanning 30 years. All three scenarios explore the impact on transition and physical risks, and the macroeconomic impacts.
With the increased focus on climate related disclosures at both a voluntary and more recently mandatory by a number of financial regulators, you may wish to refer to the Taskforce on Climate-related Financial Disclosures. Climate disclosure and climate metrics are areas likely to benefit from actuarial support.
The Principles for Responsible Investment report provides a high-level framework for any investors looking to shape real-world outcomes in line with the Sustainable Development Goals including SDG 13.
The blueprint for business leadership on the SDGs explains how five leadership qualities can be applied to its strategies in support of the achievement of the SDGs. The SDG Compass provides guidance for companies on how they can align their strategies as well as measure and manage their contribution to the realization of the SDGs.
One of the main challenges of achieving this SDG is the significant amount of financing required. This paper by the Asian Development Bank explains the role of SDG Bonds to provide the required momentum for SDG financing.
The SDG Industry Matrix jointly conceived and led by the United Nations Global Compact and KPMG International Cooperative provides industry specific ideas for action and industry specific practical examples for SDG 13.
