The financial system poses potential risks to long term environmental sustainability, warns the IFoA.
Following a review, the IFoA identified three key challenges, which are: economic growth within a finite ecosystem, problems with GDP as a metric of economic activity and success, and the limitations of discount rates.
Based on a systematic search of 125 journals and 355,000 articles in economics, finance and the social sciences, the review found 40 research papers addressed how the financial sector related to the issue of sustainability.
The review Sustainability and the Financial System, launched at an event in London to look at the impact of monetary policy on the economy and the environment, identified the three key themes where further research is needed.
This includes how to pursue economic growth within a finite ecosystem. The review said: "The growth-oriented economic model results in an increasingly interconnected and fragile financial system whose participants are not incentivised to fully recognise the natural environment and resource constraints."
The paper also reported a potential replacement of GDP as the key metric of economic activity and success.
"GDP has received much criticism. In environmental terms it does not capture the depletion of existing natural or human capital and so promotes capital erosion," said the IFoA's Resource and Environment Board.
The review also said actuaries needed to recognise the limitations of discount rates for making financial decisions "as it may have unintended consequences for sustainability".
Nico Aspinall, one of the authors of the report and the incoming chair of the IFoA's Resource and Environment Board, said: "We found that current research shares the general view that the growth-oriented economic model we currently use results in an increasingly fragile financial system and that the current system does not provide any incentive to fully recognise natural environment and resource constraints. In addition, there is little analysis of the wider impact of the natural environment on the financial system and economy."
Lord Adair Turner, senior fellow at the Institute for New Economic Thinking who attended the launch event, said: "If you discount the far future at the sort of rates of return that private sector participants believe they are going to get, or even very low estimates of that, you will do nothing about climate change whatsoever.
"In essence I think we have, in the relationship between finance and the real economy, a set of major problems that even if we didn't have a problem of sustainability we couldn't necessarily rely on free financial markets to achieve optimal results."
Turner said once environmental and climate change factors were introduced "we can rely on it [free financial markets] even less".
"And that's why I think it's very valuable that actuaries are thinking carefully about what is the link between sustainability and the financial system and what is their role in that," he said.
