Climate change – an actuarial perspective

by Matthew Masters   •  
Blog

Although the pandemic has our immediate attention, climate change has not gone away. Carbon emissions continue to rise as economies re-open. Future climate risks remain unprecedented and systemic. 

In light of this challenge, 189 countries have committed to limit global warming to under 2°C, and preferably 1.5°C, compared to pre-industrial levels. To achieve this, we need to balance global carbon emissions with those absorbed by the atmosphere by 2050. This is commonly referred to as ‘reaching net zero’. 

So what can actuaries do?

The actuarial profession specialises in identifying and managing long-term risk. Climate change is one of the greatest risks facing our world today. Many clients of actuaries are exposed to this risk. 

The Institute and Faculty of Actuaries (“IFoA”), the organisation to which all practicing actuaries belong, supports the aim of reaching net zero. Many of the organisation for which actuaries work and help run are committed to this goal. 

Climate-aware modelling for pension schemes

The IFoA has co-produced a case study (bit.ly/3aRg9D0) illustrating what climate scenario modelling might look like for a typical UK pension scheme.

For example, the impact on future equity returns could be impacted by up to 20% over the next five years, while funding projections in all scenarios are likely to be worse than if there were no increased risk due to climate change.

So what can you do?

To borrow an analogy from the insurance actuary, the best value insurance premium that society can pay is to reduce our emissions today in order to avoid the irreversible consequences of unmitigated climate change tomorrow.

What should you be considering? 

  1. The potential implications of climate-related risks on your assets and what changes could or should be made to your investment portfolio;
  2. The impact of climate change on the employer’s covenant; and
  3. The impact of changing temperature patterns on mortality.

We are making progress. We are moving forward. Given the scale of assets held in pension schemes, the transition to net zero will not happen without your support.

Further reading

Scheme funding has improved – now what?

Blog
by Graham Newman   •  

Pensions Accounting Update As at 31 March 2024

Blog
by Angela Burns   •  

Pension scheme dynamics: Are we repeating the mistakes of the past?

Blog
by Angela Burns   •  

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