IFoA: RM vital in addressing climate threats

Written by staff reporter

Acknowledging the threat of climate change ahead of next week’s UN Climate Change Conference (COP21), the Institute and Faculty of Actuaries has published a report calling for a risk management approach as a central component of climate policy.

The risks associated with climate change are wide-ranging and could have major economic, political, social and financial impacts. Based on the work of climate scientists and climate policy experts, and actuaries’ expertise in managing risk and uncertainty, the report concludes that 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 Intergovernmental Panel on Climate Change’s (IPCC) 2°C-consistent carbon budget is not guaranteed to achieve its goal; it only has a about a 60pc 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.

IFoA says 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.

In its report, IFoA urges action in addressing market failures. It says governments 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.

The institute also says 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.

“The IFoA recognises the serious risk that climate change poses to society,” commented Nico Aspinall, chair of the IFoA’s Resource and Environment Board. “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 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.

“COP21 is a critical step towards mitigating the risk that climate change poses. 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.”

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