Climate risk is a risk caused by a changing climate which poses severe risks to humanity. Climate change is mainly caused by the increased level of greenhouse gas emissions that warm the planet which is a major challenge for sustainability. Human activities that contribute to climate change are, by definition, not sustainable, as they harm our planet on which we live and depend for all our needs. In addition to the natural greenhouse gases, humans have added more to the atmosphere creating a massive heat trap.
Awareness of the impact of climate change in our daily lives is increasing and various organizations have come forward to study its severity and impact.
World Economic Forum (WEF) has published the Global Risks Report 2022 that has indicated the health of the planet dominating concerns over a 10-year horizon. Environmental risks are perceived to be in the five most critical long-term threats to the world as well as the most potentially damaging to people and planet.
UNICEF’s 2021 report titled ‘The Climate Crisis Is a Child Rights Crisis: Introducing the Children’s Climate Risk Index’ (CCRI), presents the first child-focused global climate risk index. The report ranks India as 26th out of 163 ranked countries. This implies that children in India are among the most ‘at-risk’ to the impacts of climate change, threatening their health, education, and protection.
For many organisations, actuaries are among those, leading the thinking on climate-related risk. It is very much a part of Enterprise Risk Management (ERM) where actuaries are natural leaders with risk management being the core of actuarial training. The key areas of work carried out by actuaries are scenario modelling and stress testing, as well as working alongside others in asset management.
Climate-related risks have a direct or indirect impact on both assets and liability in pensions and insurance. Therefore, actuaries cannot ignore climate change risks. Increasingly key stakeholders (for example company boards and regulators) are also expecting actuaries to consider the potential impact of climate risks. It is therefore necessary that climate-related risk is understood and considered by actuaries in the same way as other major risks such as interest rate risk and mortality risk.
Climate change is real, and it will continue to accelerate. It is sure to have broad impacts on companies in affected industries, including on their credit profiles and/or share prices. However, this knowledge is not particularly helpful for investors or regulators unless these risks can be further granulated in terms of their scope and, more importantly, their timing and likelihood. This is expected in the coming years.