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General Features
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The new knowledge frontier

Open-access content Wednesday 2nd December 2020 — updated 10.45am, Tuesday 4th May 2021
Authors
John Bayliss
Patrick Cleary

It’s important for actuaries to be knowledgeable about climate and sustainability issues, say John Bayliss and Patrick Cleary of the newly formed Sustainability Board

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Humanity is facing a climate crisis, as well as other sustainability concerns, and actuaries will need new knowledge and skillsets if they are to deal with these challenges in their day-to-day roles. While these challenges present a huge risk in that they could potentially make our profession uncompetitive, they also provide an unprecedented opportunity for actuaries to take a leading role.

Do all actuaries need to know about climate and sustainability issues? Yes – for two key reasons. Firstly, there is the sea-change in society’s attitude: the public now expects policymakers and regulators to understand climate risk and the transition to a low-carbon economy. When you have this understanding, you quickly see the interconnectedness of all sustainability issues.

Secondly, and more fundamentally, actuaries use data to make financial judgments about the future. Traditional tools that do not allow for constraints and dynamic interactions do not adequately describe that future. Without significant overhaul, many of these tools will no longer be fit for purpose. They obscure the uncertainties that we must acknowledge if we are to make informed judgments about the future. If we are too narrow when it comes to considering risks, we could be overconfident in giving advice – and give too little consideration to uncertainties. 

Making connections

It is not sufficient to understand financial solutions as single actions. The interconnectedness of regulatory and individual actions means we must consider how the system acts as a whole, magnifies systemic risks and threatens the actuarial premise of future forecasts. 

Uncertainties are higher than might be suggested from analysing historic data, and global interconnectivity and leverage are making the impact of these uncertainties larger. Historically, the action of an individual agent was considered independently of others’ actions. Now, mitigations must be based on systemic, collective terms. 

To be successful, actuaries need to be versed in sustainability issues, and in the systemic impact that their proposals may have on long-term collective outcomes. They need to be able to advise where efforts to address systemic risks can create more resilient, navigable pathways – especially in relation to climate change. 

Climate change demands actuaries understand the underpinnings of climate science, including the climate scenarios of the IPCC and other bodies, and shared socioeconomic pathways. These are as fundamental as mortality changes. Actuaries need to be aware of the impact of different climate pathways on economic assumption-setting, and should be able to build appropriate forecasting models and address regulator needs. This will involve building climate scenarios, carrying out stress tests and addressing data challenges. Of course, actuaries will also need to be able to communicate all this to clients. In addition, they must have an awareness of broader sustainability issues and how they interconnect.

Actuaries’ academic frameworks need to expand to address the fundamental disconnect between traditional economic and finance theory and the implications that arise from imposing realistic resource constraints such as climate change. These frameworks must include a plurality of economic approaches, incorporating planetary and societal constraints and impact economic modelling. This includes dynamic behaviours, debt, limits to growth, ecological economics, behavioural economics, and the use of alternative metrics to those such as GDP. The frameworks must also cover systems thinking, with a particular focus on the role of governance, incentives and the theory of change. Finally, they will need to include Universal Owner Theory, which deals with questions of ownership and the potential to address systemic risks. 

The IFoA’s response

The IFoA recognises the challenges and is working hard to respond to them, for example through the Climate-related Risk Taskforce’s action plan. You might have seen practical guides for actuaries working in various practice areas, changes to exam material, a curated library of sustainability-related materials for qualified actuaries, a possible new standalone certificate on climate change for actuaries, and drop-in lunchtime sustainability webinars. A new web page under Lifelong Learning is coming soon, from which you will be able to access all this material in one place. However, these challenges are also for us to address at an individual level. What is your response?


John Bayliss is a senior actuary at the Government Actuary’s Department
Patrick Cleary is a senior actuary at the Prudential Regulation Authority

Image Credit: iStock
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This article appeared in our December 2020 issue of The Actuary.
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