WBCSD Webinar: Climate change risk - an actuarial approach - 9 December 2016 - Institute and Faculty of Actuaries
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WBCSD Webinar: Climate change risk - an actuarial approach 9 December 2016
Welcome - some housekeeping
• Please ensure your line is muted
• If you have questions during the webinar, use the “question”
function.
• You can also use the chat function
• We will be asking poll questions during the webinar
• This webinar will be recorded and distributed afterwards.
What we’ll cover in this webinar Introduction Rodney Irwin, Managing Director, Redefining Value and Education, WBCSD Managing major global risks: an actuarial approach Nico Aspinall FIA, Chair, Resource and Environment Board, Institute and Faculty of Actuaries Question and answers
Redefining Value
Solutions
Our vision:
Create a world in which
all businesses are
measured by:
• True cost
• True profits
• True value
Redefining Value
Measurement and Valuation
Integrated Performance
Management & Decision Making
Enterprise Risk Management
Better Reporting (Not More)
Meaningful Disclosure
Redefining Value – Risk Management
Objectives of the Risk Management Project
Are ERM processes effectively managing and Are sustainability risks being
prioritizing sustainability risks? disclosed to investors?
Forces creating risk Enterprise risk management Disclosures
and driving change
Social
Environmental
Sustainability function Sustainability function
Legal
Political
Technological
Economic
Enterprise risk management function Legal risk filling
Are emerging risks being identified? What is the alignment between sustainability risks reported in
sustainability reports versus legal filings?
Review of member company disclosures
29%
On average, of risks
Voluntary disclosures Mandatory risk disclosures
or aspects reported The majority of WBCSD 33% of companies do not
members produce a stand- disclose any non-financial
as material in the alone sustainability report risks in their risk disclosures,
sustainability report, were (74%). which may include:
also identified The proportion of companies – SEC Requirement – 10-K,
20-F
in the risk disclosure section combining their financial and – Risk section of the Annual
non-financial reporting into Reports
of legal filings. annual reports or self-
declared integrated reports – Corporate Governance
has increased to 26%. Reports
82% disclose the use of a
materiality process and
often publish a matrix within
the report.Review of member company disclosures
35%
of companies were
found to have Sustainability Report Risk Filing
“no alignment” Health and wellness Market environment
Nutrition People, organization and
Product and food safety culture
The issues and opportunities
discussed in the sustainability
Innovation Global financial and
report are different from the Advocacy and reputation economic developments
risk filing. Word search Trade barriers Program and project
indicated no alignment. Climate change and implementation
renewable energy Business continuity
Sustainable and circular Product liability
value chains Cyber security
Water security Raw material prices
Biodiversity
Illustrative example onlyReview of member company disclosures
57%
of companies were
found to have Sustainability Report Risk Filing
“some alignment” Preservation of biodiversity Changes in global
Human and labour rights macroeconomic conditions
Although different risk headings Pollution and accidents Commodity market risks
are used, both filings discussed Respect for indigenous Foreign currency risk
the risk of climate change and people Compliance risk
the regulatory/compliance risks associated Sustainable use of resources Stock price risk
with pollution and
Climate change Interest rate risk
climate change.
Natural disasters
Credit risk
Illustrative example onlyReview of member company disclosures
8%
of companies
were found to have Sustainability Report Risk Filing
“full alignment” Business integrity Market risk
Market strategy Innovation risk
Energy Competition risk
Only a few companies captured Raw materials Raw materials risk
all the risks in the sustainability Health and safety Reputation risks
report in their risk filing. Product performance and Ethical risks
development Health and safety risks
GHG emissions and air Environmental risks
pollution Accounting and financial risk
Impact on suppliers Supply continuity risk
Employee development Human resource risk
Diversity Illustrative example only
CompetitivenessManaging major global risks: an actuarial approach Nico Aspinall FIA, Chair, Resource and Environment Board, Institute and Faculty of Actuaries 09 December 2016
What is a risk?
Risk = distribution of potential outcomes
0.035
0.03
0.025
Probability Density
0.02
0.015
0.01
0.005
0
0 20 40 60 80 100 120
Loss (£m)
09 December 2016What is a risk?
The future is uncertain
How do we decide what to worry about?
How do we decide how much to worry?
The Actuarial Risk Principles provide a process to
answer those questions
09 December 2016Straw Poll
Are you aware of actuaries as risk management
professionals?
• Yes
• No
09 December 2016Actuarial risk management
cycle
Clearly
communicate
d
09 December 2016Risk context
Risk perception is subjective, and different for all
stakeholders
09 December 2016Risk context Impacts vary from party to party: – we must define the relevant stakeholders and assess their objectives. Many potential stakeholders Many potential objectives: – Avoid failure / insolvency – Minimise expected costs – Maximise profit – Over what time horizon? 09 December 2016
Describe the system
Data Opinion
Model
“Everything must be made as simple as possible, but not one
bit simpler.”
Attributed to Albert Einstein
09 December 2016Describe the system
Gather knowledge and data
– Avoid confirmation bias
– Look for challenge
Understand the connections
– Mental maps
– Cascade effects
Develop a base model
– Test against reality
– Don’t expect it to be perfect!
09 December 2016Measure the risk
0.035
0.03
0.025
Probability Density
0.02
0.015
0.01
0.005
0
0 20 40 60 80 100 120
Loss (£m)
09 December 2016Measure the risk Consider the full range of possible outcomes – Is it really a “normal” distribution? Allow for possible effects over the full time horizon – Does the answer next year look like the answer in ten years? Identify and adapt to a changing system – Was this an outlier, or does the model need to change? Use stress testing and scenario analysis – What happens to us with this outcome? – What outcome comes from this scenario? 09 December 2016
Manage the risk 09 December 2016
Manage the risk Develop a clear risk strategy – What risks to manage and with what frame? Control the risk – Mitigate, transfer, accept Monitor the risk – How am I driving? – Look for “Black swans” 09 December 2016
Repeat the process 09 December 2016
Differences with traditional
risk management
We do not see risk as:
Risk = Impact x Probability
– We are aware of the full range of potential outcomes
We discuss objectives with all stakeholders
We look further ahead
We test and reassess our models
09 December 2016Straw Poll
How seriously is your organisation currently
preparing for climate risk?
• Adequately
• Nearly there
• Very little
• I don’t know
09 December 2016Climate change risk 09 December 2016
Risk context
We need to be
net zero We need you
carbon by to produce a
2050 return over x
years
Government /
Investors
regulators
Who should we We want
Corporation
listen to? brands we
can trust
Clients /
Employees
customers
We want to
work for
companies that Suppliers We rely on
align with our others to exist
valuesWhat level of impact
can you survive?
Source: http://globalchallenges.org/publications/globalrisks/about-the-
09 December 2016
project/Risk context
• You can’t keep everyone happy – you have to develop
your narrative and be clear around your ambitions.
• What have you told your stakeholders about climate
change?
• How did they react?
• When will you be prepared for a net zero carbon
economy?
09 December 2016Describe the system
You can’t prevent climate change
You can reduce its severity, and plan for the consequences
Mark Carney described:
– Physical risks
– Liability risks
– Transition risks
A useful frame to discuss climate risk and your preparedness.
09 December 2016Physical risks
Physical risks: the impacts today on insurance liabilities and the value of financial
assets that arise from climate- and weather-related events, such as floods and storms
that damage property or disrupt trade.
Where are your assets?
– Sea level rises
– Windstorms
– Drought
Can you move your assets?
Can you protect your assets?
09 December 2016Liability risks Liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest. • How much have you contributed to Climate Change? • How much will you contribute? • Are you reserving for third party claims? • What is your plan for becoming a net zero emitter? 09 December 2016
Transition risks
Transition risks: the financial risks which could result from the process of
adjustment towards a lower-carbon economy. Changes in policy, technology and
physical risks could prompt a reassessment of the value of a large range of
assets as costs and opportunities become apparent.
• What do you have to do to green / protect your
business?
• How quickly can you do this?
• Do you believe climate risk is priced into asset values?
• Can you react quickly enough to a change in sentiment?
09 December 2016Straw Poll
Could the framework of physical, liability, and transitional risks
help you to manage and report on those risks better?
• Yes
• No
09 December 2016Measure the risk
Equilibrium Climate
Sensitivity is very hard,
maybe impossible to
estimate
Source: Source: IPCC 2007 4th Assessment Report, Working Group 1
09 December 2016
(Figure 9-20-1)Measure the risk
The Actuaries Climate Index
(ACI) measures extreme
weather (High temperatures,
Low temperatures, Extreme
precipitation, Drought, High
winds, Sea level) as
deviation from baseline
period 1961 – 1990.
09 December 2016Measure the risk
Assessing physical risk is hard, but you can make a start.
Assessing transition risk takes views (e.g. we can value
assets better than the market).
Assessing liability risk is “easy”:
– Liability is linked to CO2 equivalents emitted
– G20 / TFCD will provide tools
– Get on with the assessments and baseline where you are.
09 December 2016Manage the risk
• Set a plan for reducing CO2 equivalents in line with your
country’s Nationally Determined Contributions or
beyond.
• Set a plan for reducing exposure to physical risks.
• Be ready to answer the stakeholder question: “How will
your business be affected by climate change” and have
a plan to reduce that impact.
09 December 2016In conclusion • Don’t ignore climate risk, it won’t ignore you. • Work out what you need to do to protect your business. • Reassess those plans as new evidence comes out • Be prepared for an acceleration of governmental pressure. • Engage with your stakeholders over what their needs are. 09 December 2016
Straw Poll
How far do you think this approach could better help you
manage risk?
• Potentially major improvements
• Minor improvements
• I don’t know
09 December 2016Straw Poll
Would you consider using an actuary for risk
assessment?
• Yes
• No
09 December 2016For Further Information If you would like to find out more about how actuaries play a part in managing risk, please contact Matthew Levine, Policy Manager, at Matthew.Levine@actuaries.org.uk For more information on Risk Principles, please click on the below link https://www.actuaries.org.uk/learn-develop/attend-event/webinar- climate-change-risk-actuarial-approach Or you can access the IFoA website and social media outlets at: https://www.actuaries.org.uk/ http://twitter.com/actuarynews https://www.facebook.com/Actuarial 09 December 2016
Questions Comments The views expressed in this [publication/presentation] are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views stated, nor any claims or representations made in this [publication/presentation] and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this [publication/presentation]. The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this [publication/presentation] be reproduced without the written permission of the IFoA [or authors, in the case of non-IFoA research]. 09 December 2016 47
Next….
The Reporting Exchange beta
A comprehensive global resource for sustainability reporting
www.reportingexchange.com
WBCSD Webinar on The Task Force on Climate-Related Financial
Disclosure will release its Recommendations Report on
Wednesday, December 14, 2016.
WBCSD will host two webinars in early January on report and
consultation process.Thank you
Questions and Answers to Nico Aspinall Q: Risk Context slide. There is also pressure from competitor companies - either because they are doing something or they are not. Yes, but I’d see that pressure coming from the client stakeholder group. You could put industry associations in with regulators, but the point was to outline the stakeholder environment, not to get it perfect. You’ll all have different stakeholder maps. Q: Could be misinterpreting that 15% "Adequate". Some of them may be feeling that climate risk isn't high and so what little they are doing is adequate. Indeed Q: Thanks for the great webinar! The definition of risk used in the webinar seems to refer mostly to the ‘direct’ impacts of climate change. Of course, we know there are more indirect risks arising from climate change - such as a shortage of natural resources (operational risks), societal risks or regulatory risks. Do you have any advice for companies attempting to draw the line between direct and indirect risk? What if indirect risks are also material, but not recognized? I would try not to get too caught up in defining risk silos – everything is going to be connected here and that’s why it’s important to form a risk map. I’d question whether I did focus on direct risk – all of the risks you identify above are risks sitting in the transition risk under Mark Carney’s framework. I wouldn’t draw a line between direct and indirect risk if it asks the business not to worry about the indirect risk category. I’d be focussed on whether effects are material to your current business or future plans. Q: A question for the presenter: in my experience many people I engage with in the financial services sector (in South Africa) seems to completely underestimate potential climate change risks - with several very much in the "denial" space. How would you characterise the general perception of the actuary profession you deal with (and perhaps of the financial sectore more broadly)? There’s a lot of denial, but more around not being able to quantify the risk and therefore feeling unable to act. We’re working to quantify the risks here to provide better stimulus to act, but at the same time I don’t need to know the chance of being hit by a bus to know to step out of the way! We’re encouraging actuaries to step out of the way of climate risk, because there are simple precautions they can take to protect themselves. The 100% solution will take more work, but this feels like a good first step. Q: May I know should climate change risk be priced into non-life insurance or reinsurance policies? It depends what they are covering and for how long. Most non-life policies are single year, so the issue will be more about the continued ability to buy insurance as the premium will likely go up over time for assets where the risk of an extreme event gets higher and higher over time (eg on a coast). For
liability indemnity / D&O business, there’s a risk that the claim is on legacy activity, but as a buyer of a policy you just need to make sure that you are covered, and let the actuary / insurer take the risk of giving you too generous a deal because climate liability was missed. Q: my company is involved in the task force on climate related disclosure and we are waiting for the issue of the report in mid december. You told that the task force provides tool for the measure of physical risks. what do you mean? tools such as methodologies or algorithms...what? thank you Tools meaning the disclosures which will standardise a lot of the work done to assess what emissions companies are doing. Once these are out, companies should start to disclose against them and asset owners will start to use that data to assess their exposure to the liability risk. Other parts of the risk map I set out will take longer, but the TFCD should provide a starting point for emissions disclosure.
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