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The Actuary The magazine of the Institute & Faculty of Actuaries

Green Shoots with Oliver Bettis

Oliver Bettis, chairman of the Resource and Environment Board, talks to Helen Lau about the achievements it has made since its inception 15 months ago, reveals the board’s exciting plans for the future and explains how actuaries can get involved


Oliver Bettis

Having evolved from the Resource and Environmental members’ interest group, the R&E Board is the IFoA’s seventh and newest addition to the community of practice area boards. It was established as a result of the growing significance of resource and environmental issues that are having an increasing impact on society, business and the economy. The new board met for the first time in January 2014. Chairman Oliver Bettis describes its progress so far, and its future collaborations and goals.

I’m very optimistic about the future of actuaries in dealing with R&E issues. Over the past few years, I’ve found the actuarial skill set is extremely well-suited and transferable to this area

What are the objectives of the R&E Board?

The board has three high-level goals. First, to help actuaries deal with resource and environmental issues as they increasingly affect their everyday work, such as in pricing natural catastrophe risks. Second, we will develop the profession’s expertise in this field. We want actuaries to become known as a trusted source on questions of environmental sustainability, especially as it affects the financial sector. This will lead to more opportunities for actuaries to develop their careers in this area. And, third, we will serve the public interest. 

How is the board achieving these?

We encourage research and thought leadership on the potential implications of resource depletion and environmental change. Members of the board and other actuaries have participated in numerous talks, conferences, working parties and on a variety of different projects. For example, we are currently collaborating with the Foreign & Commonwealth Office in a series of meetings on climate risk, leading up to the international climate change negotiations in Paris in December. These are organised by Sir David King, the foreign secretary’s special representative for climate change. 

We have commissioned a review of academic literature on the topic of environmental sustainability and the financial system. This will be presented at a sessional meeting on 11 May and will help to guide our research effort in the coming years.

In January, we held a very well attended evening event on ‘Sustainability and the financial system’. Nick Robins from the United Nations Environment Programme gave an introduction to the project that he co-directs, entitled ‘Inquiry into the design of a sustainable financial system’. We also participated in the Annual Chatham House Conference on Climate Change last November, discussing the tail risks of climate change.

Our collaborations include working in partnership with many of the profession’s other practice areas such as the GI Board, with whom we have established a working party on climate change. The first outputs should be available later this year. We are also forming a cross-practice working party, co-sponsored by the Finance and Investment Board, to investigate new economic thinking. Changes in economics are emerging for a number of reasons, including environmental sustainability, particularly after the financial crash. We have begun working with the Risk Board and the Global Challenges Foundation to develop our thinking in areas of global risk, such as extreme climate change.

We will work with other boards and external bodies where it makes sense for us to do so, and are about to participate in a roundtable discussion with the Prudential Regulation Authority (PRA) to discuss the long-term risk of climate change to general insurers. This is motivated by a request to the PRA from the Department for Food, Environment & Rural Affairs to report on the risks from climate change to the insurance industry and on the role of regulation.

These are just a few examples of how the R&E Board is providing a platform for actuaries to understand the implications of climate change and resource constraints, demonstrating the value that actuaries can add and serving the public interest. So any actuaries interested in this field should check for opportunities on the volunteer website. 

What is the purpose of the United Nation’s Environment Programme project you mentioned?

This is a two-year inquiry into how financial system reforms can help with sustainability issues from a global perspective. It will review what rules governing the financial system are already in place to address sustainability, and how such rules can be further enhanced in pursuit of green economies. By addressing these things, it can help economies to deploy the right public capital in areas that truly need it.

The inquiry’s advisory council has global representatives from the World Bank, the International Monetary Fund, stock exchanges, rating agencies and other government federations. The financial industries have already been adopting sustainability policies. These include issuance of green bonds, requirement of environment stress tests and greater disclosure of climate change in asset valuations. However, more needs to be done.

What are the current hot topics?

Carbon bubbles have already been featured in articles we have promoted in The Actuary, and we held a seminar on this topic last autumn. Many hydrocarbon companies are potentially exposed to over-valuation of their fossil fuel reserves if governments restrict their utilisation to try to limit global warming to below 2oC. 

In October 2014, Mark Carney, governor of the Bank of England, expressed the view that the vast majority of such reserves are unburnable, and warned that a lack of long-term thinking by governments and businesses could result in a “tragedy of horizons”, which could lead to market failure.

The potential of physical limits to kick in and reduce the rate of global economic growth (for example, from depletion of non-renewable natural resources) is a long-term issue that will become more important over time. It is about the relationships between increasing consumption, depletion of non-renewable resources, changes to the climate, increasing population and technological advancement. Even though many people accept the concept of limits to growth, it remains controversial and the timing is very uncertain. There are few economic models that can combine all these dependencies and help us understand what might happen as we approach the limits of the earth’s carrying capacity. We will continue to investigate this subject, and, as in all our work, will base our thinking only on what the data and science is telling us.

The eight Millennium Development Goals set by the UN are expiring this year, and will be replaced by Sustainable Development Goals (SDGs). At a recent meeting in London on financing for sustainable development, the economist Jeffrey Sachs spoke about the SDGs (see bit.ly/1Dv0ync) and how sustainable development will be the organising principle for the world over the next decades. The goals are costed at between $2 trillion and $3 trillion, and will apply to both rich and poor nations, with poverty reduction linked to environmental protection. It was exciting to see so many enthusiastic speakers, with the venue full of finance professionals, discussing how finance can play its part in global sustainable development. 

What new topics have risen out of the board’s work?

Food security is a new kid on the block. Climate change is increasing the risk of crop failure in major food growing regions. Together with a growing population and increasing consumption, this leads to increased risk of food shortages, which could affect political stability in some regions, with consequences for supply chains and financial effects. The R&E Board is contributing to projects investigating risks to food security, one of which is organised by Trevor Maynard, an actuary and head of exposure management and reinsurance at Lloyd’s of London. 

Has technology helped with reversing the threats to society?

Technological advancement is growing at a tremendous pace and this has helped to reduce our environmental impact. Without it there wouldn’t be renewable energy technologies to reduce our reliance on fossil fuels, nor would it be possible to maximise energy efficiency at home and in our transport systems. However, technology alone will not reverse the threats. It needs to be accompanied by changes in financial systems, effective institutional frameworks, and changes in human behaviour.

Can we make use of actuarial thinking on risk to support climate change models?

Actuaries and others who have responsibility for managing risk know that models, while useful, are not sufficient for a full understanding. Other more qualitative techniques such as scenario building and stress testing are also needed. Also, the fact that the range of model output is the range from the model – not the full range of possible outcomes from the world – might not be obvious to those not used to working with models. 

The deeper understanding of risk and uncertainty (and the difference between the two) and the understanding of models and model risk are ways that actuaries can add value to the climate change arena.

What are your hopes for the future of the R&E Board, and for the role actuaries can play within this field?

Over the coming years, actuarial work will increasingly be affected by resource depletion and environmental issues. Examples are already seen in general insurance pricing, where it is probable that weather extremes have been affected in some areas. This has led to US and Canadian actuaries developing an actuarial climate index. 

We aim to work closely and sensitively with all the other practice boards to help actuaries adapt to our rapidly changing world.

We will collaborate with other environment-related professions and scientists, and engage with regulators and policy-makers where we can add value. It is not about delivering the results straight from the model or a spreadsheet. It is about understanding the implications of the results, thinking how they should be communicated and how they can be applied, now and in the long term. 

I’m very optimistic about the future of actuaries in dealing with R&E issues. Over the past few years, I’ve found the actuarial skill set is extremely well-suited and transferable to this area. The skills that we have in modelling and finance, and our understanding of risk and uncertainty, are all in great demand now – and will be even more so in the future.

For more information, please visit the Resource and Environment Board page on the IFoA’s website