Breaking with tradition

6th April 2018


P14 louise pryor

Author

IEMA

Louise Pryor tells Chris Seekings how actuaries are advising the financial world to make sustainable decisions, facilitating a global shift towards a low-carbon economy

When considering the professions at the forefront of tackling climate change, few would envisage actuaries playing an important role. Traditionally concerned with the maths and probability behind insurance premiums and life expectancies, the role of an actuary is rapidly transforming into one where climate change is increasingly central.

While not obvious at first, the issue is at the heart of forecasting risk, encompassing everything from investment returns to human health, with actuaries occupying a unique role in advising the financial world on how to respond.

I meet up with Louise Pryor, an actuary and consultant who specialises in climate change, to learn more about how the profession is evolving, and why the decisions actuaries make today could be vital in ensuring a more sustainable future.

A trying transition

I begin by asking what has caused this shift in environmental awareness among her colleagues? “Climate change has huge financial risks associated with it – we think it’s going to change the economy and how the world operates.” She explains how actuaries use sophisticated models to try to predict the outcomes of various different scenarios. “We are very interested in understanding the worst-case scenario so that we can handle that should it arise.” This could be to determine what premiums to charge people for health or general insurance, whether to provide coverage for certain infrastructure projects, and perhaps more importantly, how various scenarios could affect investments. Pryor points out how, particularly for life insurance, insurers rely heavily on the returns they make on their investments to continue operating.

A report from The Carbon Tracker Initiative warns that investors and markets are at risk of losing £1.6trn as a result of fossil fuel projects becoming redundant amid a global shift away from highly polluting energy sources. This is being driven by various initiatives, from international climate change commitments, to a boom in clean technologies.

“So if it suddenly emerges that you can’t burn those fossil fuels, and there are limits on what carbon you can produce, they are all going to lose their value – you are going to get huge changes in essentially what’s worth money and what’s not worth money,” Pryor explains.

This is one of the areas where actuaries, asset managers and pension fund trustees will have a key role in the fight against climate change, shifting the funds of some of the biggest financial organisations in the world away from carbon-intensive firms to green and sustainable ones.

However, this transition is not an easy undertaking, as Pryor reveals many have tried to push back against the way the actuarial profession is changing. “I think that it is only natural when people do their jobs very well and don’t want them to change,” she says.

“My point of view though is that these long-term risks can’t be ignored, and we are going to have to direct investments in areas that are likely to be more sustainable over the long-term. Ignoring it is simply not an option, and simply cannot happen.”

The three risks

Pryor tells me how actuaries have identified three categories of risks that they need to be aware of in their new roles, the first being the physical risks of climate change. This concerns the effect that factors such as extreme weather and rising sea levels could have on investments around the world. “Would you invest in property on the coast of Florida right now?” she asks.

“If things change a lot, you might have various health implications from climate change too. How is that going to affect labour resources for your widget factory in Bangladesh, for example?” These health risks also pose a challenge to the way that premiums are calculated for life insurance, with Pryor explaining how the sheer scale of the knock-on effects of climate change makes it increasingly complex to forecast the various outcomes.

Transition risk is the second risk she identifies, and concerns the threats and opportunities of moving towards a low-carbon economy. Pryor highlights how the economic system is driven by energy, and how this transition away from the old way of doing things poses a material risk to businesses of all kinds.

“Whole industries are going to have to change the way they work, which is making a huge difference to the renewable energy industry, for example.” The latest figures from Bloomberg reveal that investments in renewable energy and green technologies increased by 3% last year to £240bn, just short of the record set in 2015. “People used to think that this environmental shift was just ethical, and a bit warm and fuzzy, but it is a business opportunity,” she says.

The third risk she outlines might not be of concern to most but is increasingly alarming to actuaries, and that is liability risk. Pryor explains how more and more firms are becoming the subject of lawsuits for the damage they have contributed to climate change, particularly oil and gas companies.

“There is a worry that investment advisers could also be held liable because they have invested in areas that do environmental damage.” She tells me how this could even spread to architects and engineers that don’t consider their impact on climate change, warning that law companies will “go after anyone”. “That doesn’t mean we all have to be sustainability experts, but if you are not, go and talk to someone else that is, rather than just ignoring it.”

“People used to think that this environmental shift was just ethical, and a bit warm and fuzzy, but it is a business opportunity”

Cashing out of coal

One of the biggest criticisms levelled at the insurance industry by environmentalists is how it continues to underwrite coal projects that would be unable to operate without their insurance coverage. A report from the Unfriend Coal campaign reveals that insurers have signed at least 21 contracts underwriting coal in Poland alone since 2013, including the biggest plant currently under construction in Europe.

However, there is evidence that this is changing, with some of the world’s top insurers, including Zurich and AXA, having taken steps to stop covering these projects. “These big corporates don’t like bad press coverage,” Pryor says. “And I think it is gathering momentum – not as fast as some of us might like, but we are getting more and more firms saying something has to be done.”

There is also positive news on the investment side, with 15 of the world’s largest insurers, managing approximately £22.4trn of assets, divesting £14.4bn from coal projects in the past two years, with Italy’s largest insurance company Generali recently announcing a £1.8bn divestment. However, there is still a long way to go, with Pryor explaining how she thinks it will ultimately be pressure from policyholders and pension scheme members that accelerates action. “Essentially it is their money that is being invested, and if they start having strong feelings, companies will need to think more about their broader impact on society.”

She highlights how a growing number of investor activist groups are also putting an increasing amount of pressure on fossil fuel companies. “If they turn their attention to other sectors, I think the financial sector would be in their sights, and I could see that also having a big effect.”

A reflection of the growing concern many have with the way their money is invested can be seen with the launching of the Task Force on Climate-related Financial Disclosures. This was established to encourage firms to accurately report the risks climate change poses to their businesses, so investors have a better understanding of their financial health.

“Transparency is good. The more information you’ve got, the better able you are to make good choices,” Pryor says. “And this is part of a virtuous cycle – if investors direct their funds to areas they think will be more sustainable over the long-term, that will then encourage the companies themselves to be more sustainable.”

Forecasting the future

The new role that actuaries occupy is still in its infancy, and, despite some resistance, Pryor argues that sustainability will increasingly inform their decision-making in the future. She tells me how the profession is taking an interest in the UN’s sustainable development goals (SDGs), particularly the G7 target to provide 400 million people in developing countries with insurance products that protect against climate risk.

“There is a lot of thought going into how we can help people in the informal sector – people that are not formally employed – and how we can provide good saving opportunities for those people to give them a financial cushion,” she says.

I am keen to know what is driving this engagement though, and ask whether this is just a box-ticking exercise? “There are certainly some that do it because they just think it looks good for their reputations, but there are those that genuinely feel that the wellbeing of the world is good for them – it’s hard to generalise because these big corporates are all so different.”

My conversation with Pryor has highlighted the multiple ways that financial institutions are helping to mitigate and build resilience to climate change through sustainable decisions. Various reports have demonstrated how this extends beyond the SDGs, with many warning investors to move their asset allocations away from companies that do not acknowledge the surge in demand for plant-based food, the threats of antibiotic resistance in livestock, their impact on water security around the world, and a boom in demand for ethical investments. I ask Pryor if there is any limit to the scope of ethical considerations in decision-making. “You shouldn’t see it as ethical,” she says. “If these big companies ignore these issues, they are going to suffer financially – so this is financial, and is quickly moving into the mainstream.”

It is a blunt reminder that most firms see this as a business opportunity first and foremost, which Pryor says is not necessarily a problem, so long as action is being taken to tackle these global issues. However, she is keen to point out that these giant financial firms need to own up to their responsibility.

“There has got to be a change in attitude and the financial world needs to take this seriously. We can’t keep saying ‘yes isn’t it awful but there is nothing we can do’ – that is not true, there is great deal we can do.”


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