To understand the financial impacts of climate change, those who build the financial models need to understand climate science. In this article, Richard Hartigan, actuary at the Financial Reporting Council and co-author of a new report that aims to educate actuaries about climate change, lays out some of the stepping stones for closing the gaps between actuarial and climate science.
Actuaries have a big role to play! That’s the principal idea behind ‘The Science of Climate Change’, a report published today (28 June 2022) by the Joint Forum on Actuarial Regulation (JFAR); a unique collaboration between five of the UK’s financial regulators with an interest in actuarial work[1].
The report is a kind of prequel to a movie trilogy. The regulators have been developing policy on climate change extensively and for some time, but there was a feeling that a ‘gap’ existed. Actuaries were well-aware that something is happening to the climate, but were less familiar with the specifics of the science. This report seeks to fill that gap and give actuaries confidence to increase their contribution.
Using climate change terminology while keeping it accessible for actuaries was a priority in drafting the report. Actuaries might be comfortable with complex modelling, but we are not scientists. At the same time, we really need to know the science-y stuff to inspire confidence in ourselves and others in the work we produce.
The report itself starts out simply enough by answering the question: What is Climate Change?, before identifying the greenhouse gases involved, the mechanics of climate change, and efforts to model it.
Various impacts on the Earth system are then explored: global temperature changes and the possible impact of mass human migration, rising sea levels, the impact on the UK and Europe specifically, and the implication for food security and food production and human mortality.
The intimate interconnectedness of biodiversity and climate change is briefly explored, before an extensive review of nonlinearity (i.e. tipping points).
A tipping point is a critical threshold beyond which a system reorganises abruptly and irreversibly. Many of these tipping points such as effects in the Arctic and Antarctic regions will be familiar, but there are others such as the effects on ocean circulation, permafrost thaw, and forest dieback, which are less well-known but equally important.
The report then explores some of the efforts to mitigate climate change and the concepts of ‘carbon budgets’ and ‘net zero’ are explained. There’s also a handy acronym key and glossary.
Importantly, the report is not just for actuaries: it will likely find broad interest among professionals wanting to increase their basic knowledge of climate change.
At approximately 40 pages, with ample graphics which bring the concepts to life, this report will find broad interest and is an important contribution to filling a gap and broadening actuarial engagement on climate change.
Actuaries are long-termists. This report aims to get us thinking about climate change and how it impacts long-term forecasting and modelling.
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The author is an actuary at the Financial Reporting Council and a co-author of the report. The opinions expressed are the author’s own.
The Science of Climate Change is available to download on the FRC website.
[1] The JFAR is a collaboration between the Financial Conduct Authority, the Financial Reporting Council, the Institute and Faculty of Actuaries, the Pensions Regulator and the Prudential Regulatory Authority.
