Policy action needed on climate change amid flawed economic impact assessments 

IFoA proposes Planetary Solvency risk dashboard

Immediate policy action on risks posed by the climate crisis is needed or the global economy could face a 50% loss in GDP between 2070 and 2090, according to a new report by the Institute and Faculty of Actuaries (IFoA). It says current climate policies risk catastrophic societal and economic impacts.

The report, Planetary Solvency – finding our balance with nature, says: “Current climate targets accept large amounts of largely unrecognised nature and societal risk. This includes accepting triggering multiple tipping points where climate change thresholds, once crossed, may be irreversible and limit our ability to control climate change. There is currently no realistic plan in place to avoid this scenario.”

The IFoA report states: “Climate change impacts are materialising at lower temperatures than estimated. The severity and frequency of extreme events are unprecedented and beyond model projections. This is now a matter for human security, with populations impacted by fires, floods, food system shocks, water insecurity, heat stress and infectious diseases. If unchecked, then mass mortality, involuntary mass migration, severe economic contraction and conflict become more likely.”

The report, commissioned in partnership with the University of Exeter, develops a framework for global risk management and proposes a novel Planetary Solvency risk dashboard to provide decision-useful risk information to support policymakers to drive human activity within the finite bounds of the planet.

Sandy Trust, lead author and IFoA council member, said: “You can’t have an economy without a society, and a society needs somewhere to live. Nature is our foundation, providing food, water and air, as well as the raw materials and energy that power our economy. Threats to the stability of this foundation are risks to future human prosperity, which we must take action to avoid.”

Trust added: “Widely used but deeply flawed assessments of the economic impact of climate change show a negligible impact on GDP, rendering policymakers blind to the immense risk that current policy trajectories place us in. The risk-led methodology, set out in the report, shows a 50% GDP contraction between 2070 and 2090 unless an alternative course is chartered.”

Professor Tim Lenton of the University of Exeter said: “Current approaches are failing to properly assess escalating planetary risks or help control them. Planetary solvency applies the established approaches of risk professionals to our life-support system and finds it in jeopardy. It offers a clear way of seeing global risks and prioritising action to limit them.”

According to the report, Paris Agreement goals were not informed by realistic risk assessment and implicitly accept high risk of crossing tipping points. “Global risk management practices for policymakers are inadequate; we have accepted much higher levels of risk than is broadly understood. Policymakers often prioritise the economy, with their information flows focused on this. But our dominant economic model doesn’t recognise a dependence on the Earth system, viewing climate and nature risks as externalities,” says the report.

It goes on: “Climate change risk assessment methodologies understate economic impact, as they often exclude many of the most severe risks that are expected and do not recognise there is a risk of ruin. They are precisely wrong, rather than being roughly right.” It adds: “Policymaker risk information is likely to significantly understate the potential impact of climate and nature risks, weakening the argument for urgent action. These limitations mean that policymakers are likely to have accepted much higher levels of risk than is commonly realised.”

The report recommendations include establishing independent annual risk assessments to provide clear global systemic risk information to national and supra-national governance institutions, setting Planetary Solvency limits that respect planetary boundaries, and enhancing governance structures to support Planetary Solvency.

It also recommends building policymaker capacity on systemic risk management, and in particular enhancing policymaker understanding of ecological interdependencies, tipping points and systemic risks so they understand why these changes are needed, as well as assessing how to embed systemic climate and nature risks into the risk management processes of nation states.

And finally, it calls for action to mitigate risk, such as creating incentives and designing policies that enable societies to collaborate towards just and sustainable futures within planetary boundaries, as well as building resilience to worsening and inevitable climate impacts.

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