Climate Solvency

The impacts of climate change are wide reaching: far from being limited to the weather, climate change impacts also include health, societal life styles, investment performance and economic performance. This results in an uncertain future. Actuaries have developed skill sets and tools that enable them to reason about uncertain futures. Currently these are applied mainly in the financial services sector to insurance, investment, pensions and banking. However, the major source of uncertainly facing us today is climate risk: we know that temperatures have already risen by 1°C since the pre-industrial period, and are continuing to rise. As responsible citizens we actuaries should be applying our skills to addressing such impacts from climate change. The alternative is for the actuarial profession to potentially lose all credibility and even become irrelevant.

The Actuaries’ Carbon Collaboration (ACC) combines the skills and experience of actuaries, economists and specialists from a range of industries both within and outside the financial services sector. The ACC explores how actuarial techniques can be used to shed light on the carbon and other greenhouse gas emissions that drive climate change. For example:

• There are many parallels between emissions and cash flows. When seen as the need to balance streams of variable flows of carbon, net zero has a clear affinity with the need to balance streams of variable cash flows which forms the basis of much actuarial work
• The time value of carbon has parallels to, but is different from, the time value of money, and there is currently no widespread effective approach to it
• The whole apparatus of carbon credits has many inherent risks and uncertainties that are similar to those faced in the financial world, and that are likely to be susceptible to similar analyses and management techniques.

This talk will cover some of the concepts developed by the ACC, shining a spotlight on relevant actuarial tools and skill sets. In particular it will describe the concept of climate solvency, drawing analogies between capital management in an insurer with the need to limit carbon emissions. We will also discuss key areas where actuaries are playing leading roles and consider where else our skills could contribute.

Find the Q&A here: Q&A on 'Lessons and Challenges for the Profession'