In the lead-up to COP26, Louise Pryor and Sandy Trust set out the pivotal role actuaries have to play on the journey to sustainability
You’re going to hear a lot about COP26 this year, but what is it? COP stands for Conference of Parties, which is a conference where the world’s countries come together to set out actions against climate change. The 26th COP will be held in Glasgow in November, having been postponed from 2020.
COP21, held in Paris in 2015, was pivotal. In an almost unprecedented display of global unity, 197 countries signed the Paris Agreement. The agreement aims to hold the increase in global temperature relative to pre-industrial times to well below 2°C – thought to be the maximum temperature change that our global society might be able to adapt to. The increase so far has been 1°C, so there’s not much room left for manoeuvre. As global warming is driven by emissions of greenhouse gases (GHGs), emission levels must be drastically reduced if we are to have a reasonable chance of achieving this objective. In essence, we have a global carbon budget; if we go over budget, we’ll almost certainly have more climate change than we can manage.
As part of the process, each country agrees to a nationally determined contribution (NDC), which expresses its commitment to decarbonisation. The NDCs recognise that the pace of decarbonisation will vary between countries, but that total worldwide GHG emissions must remain within a global carbon budget for the collective effort to be effective. The first round of NDCs were not enough – it is estimated that they will result in 3.7°C of warming, well over double the implied Paris goal of 1.5°C (the usual interpretation of “well below 2°C”).
Countries will be updating their NDCs at COP26, which is why it’s so important – it’s a chance to get things right. Much has changed since COP21. Public concern around sustainability and climate change are at high levels as the physical impacts of climate change become more visible. Globally, politicians are committing to net-zero policy objectives to mitigate climate-related physical risks and to accelerate the global energy transition. In the US, the Biden administration is clearly pursuing quite a different climate policy to the Trump administration. There is significant hope that politicians will collectively agree to more NDCs that are ambitious enough to meet the goals of the Paris Agreement.
Where does net-zero come from?
One obvious question we could ask about the dual temperature goals of the Paris Agreement is: Does it actually matter if we limit global warming to 2°C or 1.5°C? The answer is: yes.
The Intergovernmental Panel on Climate Change issued a Special Report on 1.5°C of global warming in 2018. In this report, the global scientific community found that the extra half degree of warming would increase climate impacts significantly. For instance, it could be the determining factor in whether coral reefs will continue to exist, and whether Mediterranean regions will become deserts.
The report also set out the decarbonisation trajectories required to limit global warming to 1.5°C in a set of four scenarios, referred to as P1 to P4. Of these, P3 and P4 are widely thought to lack credibility as they rely on significant levels of carbon capture and storage after 2050, using technology that hasn’t yet been invented.
P1 and P2 both require 50% or 60% reductions in GHG emissions by 2030, with ‘net-zero’ emissions by 2050 – a situation where the Earth system naturally absorbs at least as much GHG as our society emits.
The report has led to ‘net zero’ becoming the rallying cry for climate action this year, with many corporates and financial services firms making net-zero commitments to complement those made by politicians.
“We need to recognise that we wield great power through the decisions we oversee in the global financial system”
Does the IFoA support net zero?
The IFoA issued a climate change statement in January, recognising that the climate is changing due to human activity and calling out climate change as one of the greatest risks facing the world today. The statement suggests that the best value insurance premium society can pay is to reduce our emissions today, in order to avoid the irreversible consequences of unmitigated climate change tomorrow.
To support the net-zero goal, the IFoA commits to advocating for policy frameworks that aim to achieve the objectives of the Paris Agreement, and for the development of effective methods for incentivising GHG reductions. A key course of action for the IFoA and its members is to use our actuarial skillset and influence to help equip the wider global financial services markets, so that they can accelerate into a just and sustainable net-zero transition.
What role can and should actuaries play?
One of the lesser-known aspects of the Paris Agreement is the goal to make finance flows consistent with a pathway towards low GHG emissions and climate-resilient development. While GHG emissions physically drive global temperatures, financial systems play a huge role behind the scenes because every pound that is lent, spent or invested has a real world impact.
Actuaries are pivotal in the fields of pensions and insurance, and increasingly in banking, too. These industries directly influence what the future will look like, as they determine what sort of activities are financed and insured. In the UK, for example, approximately a third of total investments are related to pensions. In other words, the decisions we make about how to invest these funds can make a profound difference.
However, this will require a mindset shift for us. We must consider not only the direct financial impacts of our decisions, but also the broader real-world impacts that could have long-term effects on customers, shareholders and wider society. We must consider the financial system not as separate from the wider Earth system, but as intricately linked to it. Money cannot put right the fundamental changes that climate change might bring after it is too late – but the financial world can help keep it from getting too late. We will need to adapt our actuarial toolkit so that it embraces new concepts such as systems thinking, sustainability, risk interconnectedness and net zero.
We will also need to evolve our sense of responsibility, recognising that we wield great power through the decisions we oversee in the global financial system – we have the power to make choices today that will have far-reaching and profound implications for tomorrow. Now is the time for us to update our operating manual and incorporate long-term sustainability into the tenets of the profession.
We actuaries have an immense opportunity here. We can play a part in securing a sustainable future, ensuring pensioners, policyholders and society at large will have a world worth living in. And we must choose to do so.
Louise Pryor is a sustainability actuary and president-elect of the IFoA
Sandy Trust leads EY’s Sustainable Finance Consulting team and is deputy chair of the IFoA’s Sustainability Board