Aled Jones sets out the issues of fairness posed by the environmental crisis, and why actuaries are well placed to help in this area
Fairness and intergenerational considerations are core elements of actuarial work. The challenges associated with the transition to a more sustainable economy give actuaries new opportunities to apply these skills, particularly in understanding and addressing the associated environmental justice issues.
Continued biodiversity loss and climate change will have a significant economic impact, and the way we address these environmental challenges will be a further source of financial risk – in terms of not only pace and orderliness, but also fairness. Tackling environmental challenges without due consideration of justice issues could lead to material financial losses; for example, an unjust transition could increase societal tensions and translate to higher litigation risk, reputational risks and health risks for marginalised and impacted communities.
Within the area of sustainability, there is a long history of exploring environmental justice issues. The global pressures caused by climate change, biodiversity loss and other environmental damage often fall disproportionately on specific groups, who face increased exposure to risk or unequal access to environmental services. Environmental justice outlines ways to manage these impacts more equitably. Different sustainability challenges are likely to cause different justice issues.
Justice issues associated with net-zero transition
The transition to a net-zero economy predominantly focuses on changes to the global energy system and the deployment of infrastructure. In developing countries, the expansion of energy infrastructure, whether large-scale mining, the construction of dams or the roll-out of oil pipelines, has caused a range of injustices, such as human rights abuses and the marginalisation of local communities in decision-making processes.
Energy justice issues are also relevant to developed countries, with energy poverty, power plant location and the ownership of new infrastructure all being relevant to policy. Indeed, a rapid transition to a net-zero economy, while key to tackling climate change, could increase social inequality by concentrating investment and returns on investment into a smaller and smaller group of clean technology investors and owners.
Energy justice issues have grown in importance during the last few years, particularly for policymakers. One framing uses eight key principles: availability, affordability, due process, transparency and accountability, sustainability, intra-generational equity, inter-generational equity, and responsibility. Another uses three core tenets: procedural justice (how local knowledge and representation can contribute to just outcomes through public participation), distributional justice (how energy benefits and harms are distributed), and recognition justice (how groups, particularly marginalised or deprived communities, are ignored – potentially causing social inequalities).
Justice issues associated with environmental damage
The wider issues associated with environmental damage, such as biodiversity loss, are harder to quantify and map in the short-to-medium term. Justice issues relating to these losses are complex, and likely to have an additional material impact for businesses. Societal and regulatory pressures will mean that engaging with these newer justice issues will likely become a necessary part of actuarial practice, as well as offering a new area in which actuaries can offer their expertise.
At the simplest level, the issue of intergenerational fairness relating to environmental damage comes down to a choice of the discount rates applied to projected outcomes. The UK government’s Green Book identifies the concept of social discounting and includes a social time preference rate of 3.5%. Pension members and trustees may feel differently about the appropriateness of this rate – as would different academics or pension fund employees. The impact of different choices of social time preference on younger and future generations could be significant.
Even without a change to the social time preference rate, it is important to understand its impact on decisions – whether through modelling alternative rates (even negative rates) or more qualitative assessments of different pathways.
When we explore justice issues over shorter timescales, the quantification of impacts can still be very difficult, as they are often subjective. This is particularly true when trying to put a value on the environment. Different types of value – such as cultural or physical – can be placed on the same assets, and different stakeholders may ascribe different values based on their perception of or attachment to that asset. Values can also be influenced by an individual’s political ideology and are often dependent on existing power structures.
Financial risks associated with justice issues
Addressing climate change and biodiversity loss without considering justice could lead to material financial risks, even if climate change and biodiversity loss are halted. These risks could include:
- Liability risks – There are several examples of local groups having prepared criminal charges and civil suits against international companies relating to environmental damages. In addition, legal changes in Canada and the UK now allow international companies to be sued in Canadian or UK courts for activities carried out abroad. Developments such as these could substantially increase litigation risk.
- Health risks – Both environmental damage and the transition to net zero may impact the mortality and morbidity risk of different groups of people. For example, polluted waterways and low air quality can adversely affect the health of residents, while the closure of large coal-fired power plants could adversely impact the mental health and finances of affected communities if not managed appropriately.
- Valuation risks – Where all other aspects of risks are well managed, it may still be possible to under (or over) estimate risk exposures by adopting overly narrow or incomplete valuation metrics. Deliberative valuation methodologies could help mitigate this risk by considering different monetary valuation perspectives – especially the cultural, spiritual or social values of certain ecosystems.
- Supply chain risks – Justice issues within globalised supply chains are likely to increase in importance during the next few years. The treatment of local communities and their access to environmental services will feature in new legal requirements around risk disclosures. As public interest increases, companies may face heightened reputational and financial risks associated with their supply chains.
- Intergenerational risks – The collapse of certain ecosystems, such as fish stocks or forests, will have a far-reaching impact on the economic activity of certain regions, as well as large (but currently uncertain) impacts on wider society. These cascading risks are difficult to model, so we need a qualitative and systems-based approach to improving understanding.
A framework for considering justice issues
Actuaries already work within frameworks that bring fairness into decision-making, such as Treating Customers Fairly and the Principles and Practices of Financial Management. Additionally, actuaries often consider intra and intergenerational fairness – especially in relation to pension funds. These concepts can be extended to support the assessment of environmental justice issues.
In early 2021, the IFoA Biodiversity Working Party published a paper on biodiversity justice, which recommended that actuaries adopt the framework set out by Rutgerd Boelens, Jeroen Vos and Tom Perreault in their book Water Justice. This framework breaks justice down into four concepts:
- Recognition – Inequality and discrimination must be recognised and considered
- Participation – All those affected must be involved in the decision-making process
- Distribution – Resources must be allocated as fairly as possible
- Socio-ecological justice – Nature must be considered as a participant.
Actuaries are well-placed to use their data analysis expertise, as well as their experience of factoring in the views of different stakeholders, to help understand justice issues and embed them into decision-making processes and projections. In particular, the ability to explore the sensitivity of projections to different assumptions and inputs will allow the full spectrum of justice issues to be better understood.
Aled Jones is director of the Global Sustainability Institute at Anglia Ruskin University
Image credit | iStock
