"Burning bright or a shadow in the night" - how the actuarial profession is pushing forward best practice for assessing biodiversity and nature-related risks
- Emily McDonald
In July, I was delighted to attend a webinar hosted by the Institute and Faculty of Actuaries (IFoA) on behalf of the Institute. The panel of experts led a comprehensive overview of their new Biodiversity and Nature Related Risks (BDNRR) policy, encapsulating three key topics: understanding the significance of Biodiversity and Nature Related Risks (BDNRR), the relevance of BDNRR to actuaries and an overview of the policy, and future initiatives.
BDNRR: What are they and why should we care?
The webinar commenced with an exploration of some fundamental terms such as “nature” and “natural capital” I was surprised to learn just how much these natural resources contribute to economic activity, with approximately 50% of global GDP being considered either moderately or highly dependent on nature. With increasing scarcity of natural resources due to their rapid deterioration, financial experts are now concerned with a potential increase of operational costs and stranded assets for businesses on the horizon. It is therefore a viable conclusion that nature poses several risks. Such risks include reputational risk for companies reliant on natural resources, and biodiversity risks with now 1 in 4 species vulnerable to potential extinction due to human activity. It was discussed that unlike climate change which has a measurable variable of carbon emissions to quantify risk and impact, there is not a unit of emission or impact that is easily captured or measurable in terms of biodiversity. The value of nature is also deemed ambiguous with no common framework: valuations of nature are subjective – differentiating measurements are produced across different organisations depending on the relative importance of nature to that business.
I think it is fair to say that even amongst experts the valuation of natural capital is considered complex. Current tools only measure parts of ecosystems which have direct impacts, omitting the indirect impacts. Direct impacts are easily observable in sectors such as agriculture and infrastructure, however indirect impacts are deemed to be larger, such as food and water quality into supply chains. Ultimately, having no food is an indirect risk for the entire economy, which again impacts businesses. This cycle of risk is denoted as systemic risk. Another example of this kind of risk is transition risks as governments try to restore and protect nature. Such risks are set to increase as it is government impacts to restore and protect nature that are driving that change. This idea of systemic risk was illustrated well in the Worldwide Fund for Nature (WWF) circular diagram of “Interactions Between Climate Change, People and Nature”. Essentially, when nature functions well, it stores carbon, and conversely, when damaged, omits carbon. The panellists also highlighted that it is important to consider how changes in disease vectors can impact predator prey cycles for example, organisms that carry and transmit infectious diseases and ultimately, impact human health and health of other species. But while much of the discussion focused on risk factors, the panel also noted opportunity factors in nature-based solutions and highlighted the large investment opportunity that nature presents.
BDNRR: How are such risks relevant to actuarial work?
Although I do have a passion for tough maths, I am not an actuary. Yet the panel’s exploration of the impacts of nature risks on all aspects of actuarial work was fascinating. One of the panellists opened this section with a metaphorical question: “Is it burning bright or a shadow in the night?” This was particularly effective in emphasising the need to shed light on the overlooked risks and opportunities BDNRR presents. The risks encompass asset and liability risks, regulatory aspects and opportunities for investments.
Over 21 examples have emerged of banks and supervisory authorities making statements on biodiversity over the past few years. One statement by the Network for Greening the Financial System (NGFS) highlighted that: “Biodiversity loss is potentially as economically and financially impactful as climate change.” This gave the panel the opportunity to reflect on the Kunming-Montreal 2022 Global Biodiversity Framework, (a framework endorsed by the IFoA) which was described as the “Paris Climate Agreement for biodiversity” (The panellists highlighted 3 key areas from this framework for the financial sector to adhere to: #14. “Integrating biodiversity into investment decision-making”, #15. “Disclosure of nature-related dependencies, impacts, risks and opportunities” and #19. “Investing in innovative financial solutions”. To elaborate, we should “best treasure nature”, then ensure the benefits of this are distributed equitably and fairly, considering diversity factors that include populations such as indigenous peoples.
To do so will require financial resources and thus, it is clearly important to integrate the risks and consider how we can invest in the opportunities. The panel explored the multifaceted nature of the impacts of BDNRR on actuarial work. Risks arising from the life and health liabilities impact include diseases and antimicrobial resistance. Risks arising from extreme weather impact include negative impacts on food-dependent sectors through food inflation, which in turn can affect GDP and flow through to interest rates. This discussion reiterated how important it is to consider how BDNRR can influence macroeconomic outcomes.
BNDRR: Now for the IFoA policy
Listening to the panel outline the future work for the IFoA seems very much aligned with that of the Chartered Banker Institute. IFoA: “Advocate for the development of effective policy frameworks”, “Use the actuarial skill set and influence to help equip the wider global financial services markets to fully incorporate biodiversity risk”, “Support actuaries in their understanding of biodiversity risk”, “Advocate for better disclosure” and finally, “Support collaborations”.
For actuaries, the challenges of BNDRR can open up a plethora of opportunities - to understand how capital is allocated, how it interacts with regulatory frameworks and whether in turn, which can escalate biodiversity and climate change efforts. Like the institute helping members develop skills to identify risks and consider how to engage in the issues seems a primary objective. As for bankers, by recognising the interconnectedness of risks and opportunities, actuaries can assess risks and incorporate them into existing matrices and frameworks. Through visualising the interactions between climate change and biodiversity, actuaries can consider the possibility of new synergies and potential trade-offs. For example, it was mentioned that some climate change technologies have negative impacts on nature, and so weighing up these trade-offs is an important consideration. Furthermore, actuaries can consider product design, offering investment and pension options that align with customers’ ethos to impact nature in a positive manner.
I am still fairly new to considering the economic impacts of climate and nature-related risks. Having recently completed the Chartered Banker Institute’s Foundation Course in Green and Sustainable Finance, this webinar provided me with an opportunity to hear how other parts of the financial services sector are understanding and addressing current challenges. A highly informative and comprehensive review of the importance of BDNRR in the financial landscape, its relevance to actuarial work, and an overview of their policy and future ambitions – it also highlighted the importance of the topic across the economy, with many of the risks identified relevant to other professions, like banking. Undeniably, BDNRR is an evolving and complex topic which requires professionals to apply their knowledge and expertise to help navigate some of the challenges and opportunities that BDNRR presents. Through integration of BDNRR considerations into our analyses and decision-making processes, we can all help in creating a more sustainable future for our planet and its ecosystems.