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The Actuary The magazine of the Institute & Faculty of Actuaries

Risk management approach essential in response to climate change risks

In advance of the 21st Conference of Parties to the United Nations Framework Convention on Climate Change (COP21) next week, the IFoA is calling for governments and businesses to take a risk management approach to climate change as essential in addressing environmental risks. 

Drought and boy © iStock
IFoA: "Without early action, climate change will continue to be disruptive in the first half of this century" © iStock
In a report published yesterday, the Institute and Faculty of Actuaries (IFoA) said “Climate change is one of the biggest threats that society faces. The risks associated with climate change are wide-ranging and could have major economic, political, social and financial impacts. The IFoA is deeply concerned by these issues and supports efforts by governments at the UN Climate Change Conference (COP21) next week to address climate risks.”

Nico Aspinall, chair of the IFoA’s Resource and Environment Board commented: “The IFoA recognises the serious risk that climate change poses to society. The actuarial profession is committed to working with governments, business and other stakeholders to help better understand the long-term consequences of climate change, and help develop policy options to respond to these risks.

The cost of delay is also specifically addressed in the report. Aspinall highlighted that: “The effects of climate change are already being felt on a global scale. Without early action, climate change will continue to be disruptive in the first half of this century and has the potential to become catastrophic in the second half.

Based on the work of climate scientists and climate policy experts, and actuaries’ expertise in managing risk and uncertainty, the report concluded that:

1   Climate change is a risk management problem – current climate policy is based on an understanding of what is expect to occur, when in fact future temperatures could be more extreme. If society is to understand and avoid a worst case scenario, the scale and impact of extreme scenarios should be a prominent element in climate policy.

  The cost of delay is high and early action on emissions will improve future options – failure to take timely action on emissions is likely to lead to more costly and disruptive remedial action at a later date, as well as earlier and more severe climate impacts.

3  Continuous assessment and dynamic management should be central aspects of climate policy – there is considerable uncertainty about the precise nature and timing of climate change impacts and how they will affect the population. The Intergovernmental Panel on Climate Change’s (IPCC) 2°C-consistent carbon budget is not guaranteed to achieve its goal; it only has a 2/3rds chance of limiting temperature rises to 2°C. Governments need to ensure that climate risk is continually assessed to reduce uncertainty and new information and insights are used to inform policy responses.  

Action is needed to address market failures – governments also need to recognise their role in correcting market failures, for example by pricing the negative effects of greenhouse gas emissions. Effective policies for pricing carbon, and for compulsory and standardised disclosure of climate risks, will allow markets to rationally and systematically respond to climate change.

5  Policymakers and financial institutions need to balance multiple timeframes – current approaches to policy and investment decisions tend to place a high value on the short-term, potentially at the expense of future generations. Both policymakers and financial institutions need to consider the time horizons on which they are basing decisions and how their decisions may affect people now and in the future.

“COP21 is a critical step towards mitigating the risk that climate change poses,” said Aspinall. “However, governments and businesses need to move away from short-term thinking and make sure policy and investment decisions take account of future generations. Our report concludes that continuous assessment and dynamic management as part of a proper risk management approach to climate change should be adopted as central aspects of climate policy. This will help ensure risks are identified in good time to properly plan for any disruption and economic and social costs in the future.”

A full copy of the report can be downloaded at: bit.ly/1MV5NwA