Climate risk: Time to branch out

Louise Pryor and Nick Spencer discuss the IFoA’s recent progress on climate-related risk and their work as co-chairs of the Climate-Related Risk Taskforce

Climate-related risk has been a significant focus for the IFoA recently – Council has endorsed a wide-ranging report from the Climate-Related Risk Taskforce (CRRT) report and a new policy statement on climate change. CRRT co-chairs Louise Pryor and Nick Spencer discuss these recent developments.

Why is climate-related risk so important for actuaries?

Climate change has potentially significant economic and financial impacts. In other words, it is a major risk, and as actuaries it is simply not something we can ignore – if we did so, we would be letting our clients, employers and stakeholders down.

Climate-related risk is not as amenable to quantitative analysis as some of the other risks actuaries deal with due to a lack of historical data. This means that we need to apply judgment and extend our skillset to analyse it effectively. In many countries, including the UK, there is also pressure from regulators, which are starting to take climate risk seriously. This means that actuaries working in regulated industries have to take it seriously, too.

Awareness of climate issues throughout the business and financial worlds is increasing. This provides actuaries with opportunities to get involved, whether through modelling various aspects of carbon emissions or offsets, or through climate-related financial disclosures. There is also increasing demand for actuarial skills in green finance and environment, social and governance investing.

What has the IFoA been doing on climate-related risks?

The IFoA has been involved in climate-related risk for many years: in 2013 it established the Resource and Environment Practice Board (now the Sustainability Board), which grew out of an earlier member interest group. Last year, the IFoA was one of the founding signatories of the UK’s Green Finance Education Charter (see Green Finance Education Charter box) and it recently released a climate change statement (see IFoA climate change statement).

As part of the IFoA’s new strategy, we recognised that actuaries need to be able to deal with climate risk in the same way they deal with other significant long-term risks, and that as a body we need to recognise the potential impacts and implications of climate change. In response, the CRRT was tasked with producing an action plan.

Green Finance Education Charter

The Green Finance Education Charter (GFEC) was developed by the UK Department of Business, Energy and Industrial Strategy, the Treasury and the Green Finance Institute, and is intended to act as a tool for focusing collaboration between government and industry. Announced in July 2019, it commits UK professional bodies to integrate green finance and sustainability into their core curricula, new qualifications and their members’ continued professional development.

The IFoA is one of the original 12 professional bodies to sign the Charter and has undertaken to integrate green finance into its work and to engage and educate its members. Further details can be found at bit.ly/3axpY8y Under the GFEC, the IFoA commits to:

By December 2020  

• Engage members on issues related to climate change and environmental issues, with the aim of raising their profile within our professions  
• Curate, develop and promote relevant resources on green finance to our members  
• Encourage adoption of relevant global and national standards, frameworks and guidance, including Principles for Responsible Investment, Banking and Insurance, and the Taskforce on Climate-related Financial Disclosures.

By December 2021  

• Review our professional Codes of Conduct and related guidance, and update or augment these to reflect green and sustainable finance principles  
• Review programmes of initial and continuing professional development to ascertain existing coverage of green finance and opportunities to encompass it.

By December 2023  

• Mainstream the principles and practice of green finance into our programmes of initial and continuing professional development (as relevant).

Additionally, on an ongoing basis, the IFoA commits to:  

• Engage with policymakers, regulators, researchers and practitioners to identify and promote impactful and effective best practices in green finance  
• Collaborate with GFEC signatories and other domestic and international counterparts to enhance and promote the integration of green finance into academic and professional programmes of education and training  
• Work with our governments to engage employers in order to encourage commitment to, and take-up of, green finance programmes of initial and continuing professional development  
• Report annually on our progress in mainstreaming the principles and practice of green finance.

Why was the CRRT formed and what does it aim to do?

The challenge of climate-related risk lies in both its wide uncertainties and its pervasive nature. It impacts every element of the economy, and within actuarial work is not limited to specific skills, tools or domains – it cuts across multiple practice areas. In recognition of the need for an IFoA body that could provide effective oversight of how climate risk is handled throughout the organisation, Council joined with the Sustainability Board to establish a dedicated taskforce. The CRRT was set the objective of considering the broad implications of climate risk and opportunity for the IFoA and developing an organisation-wide action plan.

At the end of last year, the CRRT provided a report to Council on climate-related risks with an action plan and recommendations.

What does the CRRT report set out to achieve?

The core goal of the CRRT report is for climate-related risk to be understood and considered by the IFoA’s members in the same way that other major risks, such as interest rate risk and mortality risk, are. The report’s objectives are focused on enabling IFoA members to incorporate considerations of climate-related risk into their work, supporting them to take advantage of new opportunities, and considering the IFoA’s operational impact as a membership body. The report also encourages the IFoA to work with members to speak up about the implications of climate change to support policymakers and better align the financial system with mitigation of, and adaptation to, climate change.

The IFoA’s Green Finance Education Charter (GFEC) commitments (see box above) feed into the recommended work on developing exam syllabuses and lifelong learning, and provide a timetable for meeting some of the goals.

The report was endorsed by Council, which accepted its 38 recommendations.

“The core goal of the CRRT report is for climate-related risk to be understood and considered by the IFoA’s members in the same way that other major risks are”

Can you summarise the recommendations?

When the CRRT thought about the report’s objectives, it considered the areas of action that would help achieve them – the enablers. These enablers fall into five categories:  

• Knowledge and skillsets  
• Regulation  
• Research and thought leadership  
• Engagement  
• IFoA operations.

Several of these enablers map to more than one objective, and the cross-mapping accounts for 32 of the recommendations. The other six cover the governance process.

The knowledge and skillsets enabler is concerned with lifelong learning. There will be a review of the associate and fellowship exam modules, and the IFoA will consider establishing a standalone credential (similar to the Certificate in Data Science) and support post-qualification learning. We have also just launched a curated guide on climate change to help with reflective CPD learning – view here: bit.ly/3czpBNd

Each practice board will develop an engagement plan for its members. Externally, communications will be leveraged through thought leadership and research efforts, upcoming regulatory engagements and public policy events such as the COP26 climate change summit to be held in Glasgow in November 2021. External IFoA communications will be supported by the new Climate Policy.

What is the new IFoA Climate Policy and why it is important?

Council agreed a statement on climate change, which was issued in January 2021 (see box below). It has an international outlook and takes an actuarial view by focusing on risk mitigation. It is intended to drive action, rather than being a bland statement of nice-to-haves.

Issuing the statement sets the context for all activities arising from the CRRT report. It also helps to further our strategy by demonstrating leadership, extending what actuaries do, and supporting their ability to create social impact – thus ensuring that the profession will continue to thrive. It keeps us at the heart of the increasing momentum on climate change in society as a whole, and in the business and financial worlds in particular.

What are the next steps for the CRRT recommendations, and how will progress be monitored?

The CRRT recommendations are being incorporated into the IFoA’s corporate plan and will be implemented during the next few years. The Management Board, supported by the Sustainability Board, will keep a close eye on progress. We thought it was important for climate risk to be fully integrated into business as usual. From now on, climate change will be an integral part of what the IFoA does – not just an optional extra.

Is the IFoA looking at other sustainability issues beyond climate-related risks?

Yes, significant activity is under way covering a number of the UN’s Sustainable Development Goals (SDGs).

First, the Sustainability Board has just launched a new series of podcasts covering the role of actuaries across the different SDGs – find them at bit.ly/36A6UoZ In addition, the Biodiversity Working Party recently completed an initial position paper, which may be read at bit.ly/3rhxDi2

The third SDG – Good Health and Well-being – is a direct part of actuarial work and an area where systemic risks have been highlighted dramatically by COVID-19. Many other SDGs also have a theme of fairness, which is a direct actuarial concept.

More will follow, with the Intergenerational Fairness Working Party having already started work. As part of the Sustainability Board’s 2021 themes (bit.ly/3oB6Gny), we want to increase attention on diversity, inclusion and human rights.

Finally, recommendation six of the CRRT report, the last of the governance recommendations, is to consider the extension of CRRT actions beyond climate change to broader sustainability issues. We hope that the CRRT approach can be a template for future cross-practice efforts, especially those where knowledge and approaches are rapidly developing. 

IFoA climate change statement: excerpt

In January 2021, the IFoA released a statement on climate change. The IFoA recognises that the climate is changing globally at an unprecedented rate as a result of human activity. This change presents ecological, social, economic and financial risks. The potential impacts of climate change are global and systemic. As well as highly disruptive physical changes, there are significant implications for the entire financial system.

We are a profession specialising in risk management, and climate change is one of the greatest risks facing our world today. It is urgent that we mitigate this risk. Future outcomes are uncertain, but the best value insurance premium that society can pay is to reduce our emissions today in order to avoid the irreversible consequences of unmitigated climate change tomorrow.

The IFoA supports the aim of the Paris Agreement to limit climate change to an increase of substantially under 2°C from pre-industrial temperatures, and recognises that in order for there to be a reasonable probability of achieving this aim, there must be a transition to a global economy that has no net greenhouse gas emissions (‘net zero’) by 2050.

The IFoA will:  

• Advocate for the development of consistent policy frameworks worldwide that aim to achieve the Paris Agreement objectives through a just transition – that is, one that seeks to ensure that the substantial benefits are shared widely while also supporting those who stand to lose economically  
• Advocate for the development of effective methods of incentivising reductions in greenhouse gas emissions, such as carbon pricing  
• Use the actuarial skillset and influence to help equip the wider global financial services markets to accelerate a just and sustainable transition to net zero  
• Support actuaries in their understanding of climate risks and opportunities and encourage their incorporation into actuarial advice  
• Advocate for better disclosure of consistent and robust information about climate risk by corporates and other market participants  
• Support collaborations both between its members and with other organisations to help align national and global financial systems with a just, net-zero, sustainable economy.  
• Develop and implement a plan to be operationally net zero by 2030.

You can read the full climate change statement on the IFoA’s website at bit.ly/2YEArJu

Louise Pryor is a sustainability actuary and president-elect of the IFoA

Nick Spencer is chair of the IFoA Sustainability Board and sustainable investment adviser at Gordian Advice