The Heat is On

Esko Kivisaari Chairperson Actuarial Association of Europe

The Heat is on

At least the early part of this summer has kept us concerned about what is happening with our climate. The Chief Risk Officer Forum has published an excellent study, The heat is on – Insurability and resilience in a Changing Climate, about what to expect for the future. In addition to this text, my recommendation to actuaries is to get familiar with the Actuaries’ Climate Index. The AAE is currently investigating whether we can create a European version of this index.

The sad truth about climate change is that we are still moving towards a global temperature rise of 3-4 degrees. If this happens, it will have catastrophic consequences in many areas. We have the Paris agreement and then the IPCC report of last autumn, pointing to a way to limit the temperature rise to 1.5 degrees. There are realistic opportunities to achieve this. We must do whatever is necessary to leave the globe in a reasonably good condition for the next generations.

The EU has its sustainability agenda. Mitigating climate change and adapting to its consequences is a significant part of this agenda. Sustainability as a concept uses the ESG concept, where E stands for environment, S for society and G for governance. Climate change has been included in the E part as one of the most urgent areas, although the loss of biodiversity, for example, is one of the most pressing concerns.

On 18 June, the European Commission published guidelines on non-financial reporting on reporting of climate-related information as part of the Sustainable Finance Action Plan. In practice, this climate-related provision of information consists of a new addition to the existing guidelines for non-financial reporting. The new Guidelines contain practical recommendations on, for example, reporting of an insurer’s activities on the climate and the influence of climate change on the insurer’s activities. The EU activities are described in more detail in the recently published AAE newsletter.

The Commission has also established the Technical Expert Group on Sustainable Finance, which has continued the recommendations of the corresponding 2017 High Level Expert Group. The mandate of the expert group has been extended until the end of this year. However, the expert group published its interim reports in June. The current recommendations in a nutshell say the following:

• the taxonomy proposal provides an implementation tool that enables capital markets to identify and respond to investment opportunities that contribute to environmental policy objectives. It also provides practical guidelines for policy makers, industry and investors on how best to support and invest in economic activities that contribute to a climate neutral economy. In other words, the taxonomy is a dictionary to design and construct portfolios and to understand the exposures to different asset classes.
• the proposal for an European Green Bond Standard produces a revised version of the EU GBS, including a section on the expected impact of the EU GBS, as well as a template for the framework for green bonds. By linking the GBS In particular to the taxonomy, it will determine which climate and environmentally friendly activities are eligible for financing via a European green bond.
• EU climate benchmarks include technical advice on minimum disclosure requirements to improve the transparency and comparability of information between benchmarks on climate-related information and ESG indicators.

EU actions in the field of sustainable financing are important for everyone, but in many ways actuaries can play a leading role in the area. We are strong in modeling uncertain events and we can provide important input for the processes. We must also be careful not to sacrifice our core competences for the wishes of different interest groups. In our professional role as actuaries, we must remain calm and make our contribution in the areas where we have the competence.

When it comes to the EU we can also say that it is strong in financial regulation, while it has weaknesses in a number of other areas such as taxes or subsidies. We must recognize that finance can only do so much and it cannot change everything. In the supermarket, minced meat can cost less per kilo than vegetables, even though the meat must have eaten ten kilos of vegetables before it is minced. Finance cannot change that and actions in other areas are also needed.

This blog is written in a personal capacity.

July 2019