Actuaries: Do the right thing on climate change

Four actuaries working in insurance, regulation and consulting discuss how and why actuaries must act on climate change

What motivated you to become involved in climate change?

Sandy: I want to be able to look my children in the eye and say I did everything I could. When I joined the IFoA’s Sustainability Board in 2016 and applied risk management techniques to climate science, the results were very scary. At this point, I decided to transition my career into sustainable finance. Through where we invest and what we insure, the financial services have a huge role to play in building the future world we will live in, which means we have a big opportunity to make a difference.

Matt: About six years ago, my wife and I adopted a vegan diet for January as a post-Christmas detox. It made me feel so good that I have been vegan since. I learned that we don’t need to eat meat, that producing it is not environmentally friendly, and that there are easy steps I can take to address climate change. In my personal life, I changed to a green energy provider and bought a plug-in hybrid. Professionally, as a senior actuary, I am keen to make sure we disclose fully on climate issues and that we embed climate change in risk management.

Wendy: Back in 2004, I visited the Franz Josef glacier in New Zealand. This stunning natural wonder was, even then, getting smaller every year – a change driven by global warming. This made me wonder: 
if we continue to fail to respond to the calls for change, how much longer do we have? I’ve been an actuary for 20 years and believe in the power of insurance to protect and support customers. I used to think that tackling climate change – protecting and supporting our planet – was a problem for governments. I now realise that we can’t leave this to others. Through working in enterprise risk management and thinking about evolving risks, I saw that climate risks were starting to emerge. It was clear that action was needed, and I could make a difference professionally by enabling finance companies to address climate change.

Patrick: I studied physics and have always been interested in the convergence of maths and the real world. After university, I spent time on the Caribbean island of Nevis, a beautiful place with amazing views and sunsets. You could see how things were connected, with people coming and going at the local port, yet it was also fragile, and at risk of storm damage each year. Years have passed and I now have grown-up children. I sometimes wonder: what if the world is just a bigger version of Nevis – beautiful, connected, yet fragile? What kind of world are we creating for our children?

What is the IFoA doing to help actuaries evolve?

Matt: The profession recognises the importance of climate change and is gearing up to support the actuarial community. We issued a risk alert about climate change in 2017 and have since signed the UK government’s Green Finance Education Charter, underlining our commitment to support the development of a clean and resilient economy. We also developed a policy statement supporting climate action which, among other things, commits the IFoA to working collaboratively to align the financial system to a net-zero ambition.

In 2020, we set up a taskforce to consider how to respond to climate risk, how to enable actuaries to get more involved and how the profession might develop external relationships. We now have a structured plan, with many supporting actions to become visible in 2021, including changes to exams, reading suggestions for qualified actuaries and research to be undertaken.

Will acting on climate change cost us money and lost investment returns?

Wendy: Before we talk about costs, we need to understand our choices. What do we mean by climate risk in a financial context? We could choose a future that is hotter, with more frequent and more severe extreme weather events that lead to significant disruption and damage to infrastructure – in other words, a future with high physical risks and high economic uncertainty – or we can choose to make the changes that are needed to protect our planet and make a revolutionary transition to a low-carbon economy. A transition of this scale inevitably has its risks (known as transition risks) and costs, but also comes with opportunities. These include investing in the new technology needed to enable this transition, and supporting transformation projects such as greening the existing housing stock and transport infrastructure.

There will be short-term costs, but the long-term costs of inaction will be greater. Businesses need to understand that responding to climate risk isn’t just about ‘doing the right thing’. For insurance companies, it’s also about investing long-term and responsibly to ensure they are able to provide services to their customers when they need it. By understanding and mitigating future risks, we might just be able to stabilise our environment and remain profitable in the long term.

What is the Prudential Regulatory Authority (PRA) doing about climate change? Is it a risk we should be holding capital against?

Patrick: The PRA’s April 2019 Supervisory Statement set out climate-related expectations for banks and insurers in the areas of governance, risk management, scenario analysis and disclosure. In a follow-up ‘Dear CEO’ letter in 2020, the PRA set the end of 2021 as the deadline for firms to have embedded those expectations.

Sandy: As more organisations commit to net-zero emissions targets, actuaries will need to develop what this means for asset strategies, metrics and allocating capital.

Matt: It is not easy to allow for climate risk capital in a one-year value-at-risk calculation. Aviva has developed a climate value-at-risk metric over a longer timeframe. It might be possible to encourage green assets and discourage brown assets in some way through capital, but this is a complicated issue.

Patrick: There are a range of views about whether and how to allow for climate risk in capital. That will come in due course, but my personal view is that scenario analysis is a more urgent area for work as it helps businesses think about their future strategies in different possible outcomes.

How can actuaries get involved?

Patrick: The challenges posed by climate change read like a job advert for actuaries. We don’t have enough data, the past may not be a guide to the future, and we need to consider different possible futures over a period of decades – so actuaries, get involved! Actuaries need to go deep into some subjects (such as climate metrics or scenario analysis) and also think broadly (such as how everything might be connected and resources might be constrained).

Matt: I believe climate change represents an opportunity for actuaries. We are analytical and risk experts. Sure, we need to learn about climate science – but if we don’t, others will, and we might be left behind. My message is: ‘Don’t be afraid, get stuck in!’ Choose to get involved. With a little work, you may become a climate expert in your organisation.

Wendy: When giving advice, such as recommending a valuation basis, ask yourself: “Would this advice be different if the world gets very hot and we see a lot of physical risk?” Or: “Would my opinion be different if we saw rapid changes as we transition to a low-carbon economy?” I would like to see each actuary being climate-aware, rather than having the specific role of ‘climate actuary’.

Sandy: You can ask questions of your employer, such as “What are we doing about this?”, and point out what competitors are doing – many firms are now disclosing on climate and an increasing number are making a net-zero commitment. The IFoA has also started a Sustainability Volunteers Group, which is gearing up for significant activity in 2021 and is a great place to start.

This article was adapted from an IFoA 2020 Life Convention panel session, featuring: 

Sandy Trust, sustainable consulting lead at EY and IFoA Sustainability Board deputy chair

Wendy Walford, climate risk lead at L&G and IFoA Sustainability Board member

Matt Saker, group chief actuary at Aviva and IFoA Council and Climate Task Force member

Patrick Cleary, senior actuary at the PRA and IFoA Sustainability Board member

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