Regulators: Beware of climate risks in actuarial forecasts

Regulators are warning that risks from climate change pose a significant threat to the quality and accuracy of actuarial work.

This latest warning from the Joint Forum on Actuarial Regulation – which includes representatives from the Financial Reporting Council, Financial Conduct Authority and the Pensions Regulator – was outlined in its Risk Perspective report, published this week.

The report is yet another warning to the corporate sector that a changing climate is building systemic risk on several fronts.

As a result, the JFAR recommends that actuaries specifically assess “the impact of their exposures from physical, transition and liability risks related to climate change” and ensure these are fully incorporated into their work.

This latest warning follows a growing number of warnings to the corporate sector to be on their guard for threats to their business, due to climate change.

At the start of the year, the World Economic Forum warned that climate change and related risks – biodiversity loss, extreme weather and water and food crises – were all major threats and the likelihood of them impacting countries and economies would only increase in the next decade.

This week’s report by the JFAR once again underscored that “climate-related issues represent a material, financial risk to future economic and market conditions.”

It concluded: “The direct, and indirect consequences, of climate and environmental changes are also likely to impact claims experience and modelling assumptions.”

A separate warning was published by the International Monetary Fund, which called for tighter rules requiring listed companies to disclose the risks to their business models posed by climate change. It argued that the piecemeal voluntary approach currently operated in many jurisdictions did not go far enough.

In the UK, the FCA and TPR have increased requirements on pension funds to report the impact of climate change on their portfolios and scheme member outcomes, while the FCA has signalled its intention to place more requirements on listed companies to disclose climate change risks.

Meanwhile, the European Union continues to develop its sustainability ‘taxonomy’, a set of definitions that will make it more straightforward to understand what activities contribute to climate change and inform the bloc’s approach to regulation.

The regulatory direction could not be clearer. However, it is still evident from the lack of action from many areas of financial services that companies have not invested in the expertise necessary to interpret these new rules and guidelines and engage with them positively.

For example, many investors that make use of stock lending do not incorporate ESG principles into their strategies, despite moves from major asset owners and campaign groups to draw attention to the issue.

The Pan Asia Securities Lending Association (PASLA) recently raised concerns that a significant proportion of investors did not consider ESG factors in their stock lending programmes, despite the availability of data and technology to allow them to, for example, call back stocks to protect investor voting rights.

More than two thirds (68%) of respondents to a PASLA survey said they did not have a dedicated ESG team or specialist within their securities lending business.

When regulators, politicians and end clients are all aligned in their demands on financial services providers and the corporate sector, this level of uptake suggests either a failure to respect client demand and regulatory pressure, or a failure to communicate the benefits of an ESG approach.

Climate and environmental issues are not peripheral risks – they are core to almost every company due to the major impacts they will have.

The Intergovernmental Panel on Climate Change’s landmark 2018 report set out the risks in stark terms, warning of more and deadlier heatwaves, floods, wildfires and other “natural” disasters. All of these will impact on economies and the corporate sector, and no one can afford to ignore the risks or the opportunities to mitigate them.