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Climate change: A measured approach

Nico Aspinall, chair of the IFoA Resource and Environment Board, talks to Cintia Cheong about raising the profile of the actuarial profession and what actuaries can do in the context of climate change

04 FEBRUARY 2016 | CINTIA CHEONG

Climate Change


The United Nations conference on climate change (COP21) in December 2015 saw global figures descend on Paris for what would be an historic opportunity to meet the challenges of global warming.

Among them was Nico Aspinall, representing the Institute and Faculty of Actuaries (IFoA). Aspinall was there to participate in a workshop, organised by the World Business Council for Sustainable Development. Its main focus was to look at how businesses are reacting to climate change, and in wider discussion, managing scenarios of extreme events. He also attended an event hosted by the British Embassy as part of the ‘Green is Great Britain’ campaign.

The main objective for Aspinall and the IFoA was to build on its network within the business, risk and sustainable development community, in particular to promote the role of the actuary and the expertise they have in identifying and managing risk.

As a long-term member of the Resource and Environment (R and E) Board, Aspinall has co-authored a number of reports, including two literature reviews entitled Climate Change and Resource Depletion: The Challenges for Actuaries, and Sustainability and the Financial System.
These offer a wider review of resource and environmental concerns, the sustainability of the financial system, and the potential impact of R and E issues on actuarial practice areas.

Ahead of the conference, Aspinall collaborated on the IFoA policy: Climate Change: Managing Risk and Uncertainty, published on 26 November 2015. The document calls for a risk management approach to be a central component of climate change policy.

What did you hope to see in COP21 and what did you want to achieve?
I wanted to get a sense of how people were talking about climate change.
We went there to discuss risk management approaches, and how using actuaries can support business decision-making. We got a warm response. Actuaries are considered as being phenomenally competent individuals within the risk management field. I came away with a real sense that more is desired from the actuarial profession. We need all parts of the supply chain to become low-carbon in future. We need consumers to be conscious of the issue. At some stage they will want products to be low-carbon, and this is a huge opportunity for companies to get ahead.

When consumers start to worry about emissions they will move to these products.
We need to get every part of the supply-chain to invest in a low-carbon future so that we can be ready before the market changes.

Are there challenges in developing a robust framework to monitor climate change?
Absolutely! There’s a lot more work to be done. Risk management is an ongoing process which should learn from experience and change if required. We need to help governments focus on the extreme risks of climate change, which is a uniquely actuarial topic, particularly over the long term.

Assessing a 1-in-200 level potential outcome of different emissions targets would be valuable, just in understanding the uncertainty of outcome there is in each target.

Governments will focus first on carbon dioxide, but I think companies may need to focus more on some of the impacts. How do they manage them? How will their customers? These are both opportunities and risks which companies should be thinking about.

How do you change climate thinking to be more long-term when governments are instinctively short-term?

Fundamentally, actuaries advise long-term institutions, so ensuring their thinking is joined up is a big first step. It is important we think about our legacy. We are the last generation with a chance to do something positive about climate change. What kind of legacy do we want in 50 years time? How do we want to be remembered?

Governments may be short-term but there is also the House of Lords, which isn’t focused on the five-year term. Parts of the political landscape do have a longer term focus, and we need to ensure they too are aware of the issues.
 
How do we quantify the economic cost and change behaviour?
It is very difficult. Whether you put additional tax on fossil fuels, or incentivise people to move to green energy through tax breaks, there is a role for government policy here. The worry is that with incentives we present a choice.
A lot of people run the risk and travel without insurance, for instance. In my view, there’s no opportunity for us to run the risk of increasing carbon dioxide without limit and suffer the effects of climate change. It is not a risk we should be gambling with. Tax incentives probably do help, but we need stricter controls if businesses are not reducing their impact.

Think about tearing down rainforests. You can’t put a price on biodiversity or recreate it with money. In practice we’ll need a dashboard of different measures. How well do you manage land? How well is your supply chain ensuring there are not any impacts on virgin forests or water? These do not necessarily translate into higher taxes for people who abuse the environment. It may have to be a regulatory system that criminalises bad behaviour.
 
Why should actuaries care about energy consumption?
Over the long-term, energy is going to become more expensive. If pension schemes or insurers invest in companies that are using a lot of energy, and who are doing nothing to manage that cost, then there is a large investment risk with those shares.

Likewise, energy underpins longevity. In a hospital, you will notice there is a lot of energy consumption. If hospitals have become more expensive to run, how does it affect government policy and support for the older and infirm? Just understanding some of the resource demands gives us a better insight into actuarial factors.

Has your view on the role of actuaries changed since COP21?
Only to become stronger. As actuaries, as risk managers, we don’t just look at the expected outcome and the centre of distribution. We also worry about the full probability distribution. For instance, we don’t have to believe sea levels are going to rise by 18 metres to know there’s a risk that they will, and manage that risk.
 
We need to understand the uncertainty experts have in a topic, and use our actuarial techniques to manage that uncertainty. That is the right approach for actuaries to be taking, and we are uniquely placed to do that.
 
How does the Resource and Environment Board do cross-practice work?
We have a number of cross parties running right now. We have the Climate Change Working Party engaging with the GI Board to examine two features: the effect on liabilities and on capital market effects.

We have just launched working parties looking at pension schemes and R and E issues, and looking at illiquidity in defined contribution pensions. Most actuaries work in traditional practice areas, but I don’t want people to overly focus on calling themselves a pension actuary or a resource and environment actuary. You can be both.

How optimistic are you that we can follow through on the COP21 agreement?
The main risk is that the world goes back to sleep on this issue, thinking that it has been fixed, when there is still so much to be done. Actuaries have an important role to play in outlining the risks and appropriate pathways for emissions reductions.

Really the challenge goes back to both governments and individuals to decarbonise their activities – reduce carbon intensity through businesses – and try to ensure
future generations have some hope of living on a planet that can sustain them.