I’ve been getting this wrong. I’ve been talking about ”planet reality” for the last couple of years—outlining the gaps between climate science and the commonly used climate scenarios across the financial sector and even by the regulators. However, preparing for a recent UK actuarial Life Conference, I realised I’d not fully understood a key part—but let me come back to that later.

In August 2024, Milliman hosted an independent nonexecutive director (INED) Sustainability Forum at the St Stephen’s Club in Dublin. It focused on the critical themes of sustainability and climate risk management. We sought to provide an update on current climate science, identified significant gaps in climate scenario modelling and emphasised the need for a paradigm shift in risk management strategies. This note briefly summarises the key themes and insights from the discussion. Hopefully an aide memoire for those there, and an overview for those who couldn’t join.

Planet reality: The current outlook from climate science

Climate science paints a sobering picture of our current climate reality. Overshooting the 1.5°C warming threshold is now almost inevitable, with July and August in 2023 and 2024 marking the four hottest global months ever recorded.¹ This underscores the urgent need to address climate and biodiversity emergencies in a coordinated manner. And whilst there has been some progress, greenhouse gas emissions are still rising. What’s more, policy efforts are yet to truly engage in the amplifying effect of compounding events² on climate-related risks, which increases their uncertainty and complexity.

Mind the gap: Discrepancies in climate scenario modelling

There are significant gaps between current climate scenario modelling and up-to-date climate science. For example, two recent Institute and Faculty of Actuaries (IFoA) papers^3,4 identified key deficiencies in the current Network for Greening the Financial System (NGFS) scenarios, including:

1. Understatement of physical and transition impacts: There are significant improvements in the 2024 models to address the economic impacts of physical and transition risks. However, there are still significant gaps—on more granular analysis, allowances for compounding events and, more generally, on structural weaknesses in integrated assessment models⁵ to model volatility and transition.
2. Lack of engagement with tipping points: The current climate scenario models fail to consider the impacts of irreversible tipping points, whereas climate science predicts there is less than 2% probability of no tipping points occurring at 2.0°C of warming.⁶
3. Narrow spread of scenarios: The range of demographic and economic projections, as well as the ranges of “equilibrium climate sensitivities” (ECSs)⁷ are too limited. The models fail to capture the full spectrum of possible outcomes. (Worse, the median outcome is often interpreted as a “stress case” whereas it is actually the central case, and almost certainly optimistically biased.)
4. Absence of short-term decision-grade scenarios: The scenarios tend to focus on the very long term, whereas the need to uncover the risks and volatility that could impact in the short term is crucial for immediate decision-making.
5. Overlooking intersectional risks: Current models do not adequately account for the intersectional risks, particularly the impact of climate change on biodiversity, nor the policy approaches required for a just transition.

Embracing complex risk management

These shortfalls lead to a general, and large, underappreciation of the downside risks associated with climate change—the ”sting in the tail” of planet reality. The triggering of harmful tipping points, such as the collapse of the Atlantic Ocean’s overturning circulation, could have catastrophic consequences, including chronic food shortages and significant macroeconomic impacts.⁸ Emerging work by IFoA reviewing ”planetary solvency” states that by 2050 our current risk trajectory means that a pathway of ”catastrophic” is ”eminently plausible,” which is to say that climate change could plausibly be a significant cause of greater than 25% global mortality, and a greater than 25% gross domestic product (GDP) loss.^9,10

To address these challenges, we need to shift from historically calibrated risk tools to prospective, decision-grade risk techniques. At Milliman, we have developed an approach to complex risk analysis which starts with key business impacts and then builds a systems-map to identify and understand how interconnected risks can affect and influence those impacts. This mapping can also help identify and investigate potential tipping points.

A complex risk approach can help organisations navigate the tensions between competing financial and sustainability objectives. For example, it can start by looking at impacts of fossil fuels divestment against the competing interest of sustainability and financial objectives. It can then help identify interacting factors, for example potential geopolitical divergence globally whilst there is accelerated transition efforts in Europe. Considering the interactions and critical notes for the whole system enables insurers to develop more realistic, and more responsive, mitigation and adaptation strategies. These relationships can be quantified by translating the output into a causal model. Through this quantification, it’s possible to consider prospective risk distributions for current states and economic transitions that aren’t necessarily in the historical data. A holistic approach can highlight business opportunities and potential risk mitigants.

Enhancing enterprise risk management: Ability, agility, and alignment

During our forum we discussed three themes to improving the management of climate-related risks—enhancing an insurer’s ability, agility, and alignment:

• Ability: Improving the skills and competencies within the organisation to understand and manage climate-related risks. This includes better integration with liability risk management and addressing the intersectionalities between biodiversity, society and other transitions such as generative artificial intelligence (Gen AI).
• Agility: Enhancing responsiveness, this could involve conducting a premortem of plausible impacts to navigate the uncertainties as they unfold. In particular, awareness of prestressed (fragile) environments where a small additional change could have an outsized impact.
• Alignment: Staying abreast with regulatory expectations and best practice should be a minimum goal. Many will wish to go further, and should at least align with their publicly stated purpose and corporate values. From an organisation perspective, reputational risk could easily be a top-three sustainability risk (as well as an opportunity).

INED feedback: Challenges and opportunities

We are grateful to the INEDs and risk officers who shared their insights and feedback. This highlighted the different challenges and opportunities INEDs and insurance company boards of directors face along with some practical next steps.

CHALLENGES included raising the board’s engagement and awareness of the ”planet reality” impacts and business consequences. The longer-term time horizon of climate change makes this a particular challenge, specifically making the medium to long term a priority today. It can be difficult to understand the fundamentally strategic nature of these risks and there are significant data and quantification challenges associated with developing robust materiality assessments and reporting. There is a reluctance of boards to act off of narrative scenarios and in the face of uncertainty. In contrast, the direction and longer-term impacts are clear. It is the uncertainty in the timing and sequencing that makes the quantification hard. Resourcing and the internal agility to manage the uncertainties compound these challenges.

OPPORTUNITIES: Change always brings opportunities and this includes anticipating shifts in consumer demands, developing new products and inverting the risk management lens to identify where opportunities lie. Reinsurers could find direct opportunities as insurers seek to manage the longer-tail uncertainites. Everyone has agency to leverage their influence with regulators, policymakers and the wider industry to help manage climate change as a long-term, systemic risk.

NEXT STEPS for INEDs start with insisting on board education and training to understand the planet reality and address the awareness gap. It is helpful to prioritise one or two aspects to avoid being overwhelmed by trying to take on everything at the start. INEDs can upskill so they can challenge board level engagement and the approach of their current strategies. They can also enable efforts through supporting internal initiatives, ensuring clear executive accountability and aligning executive compensation. If there is still reticence, INEDs can help address perceived conflicts and lack of urgency, for example asking whether climate change is only a (distant) future issue or one that impacts stakeholders now?

This was a helpful way to conclude the forum—providing not only an outline of the challenges but the opportunities and actionable next steps. As highlighted by a number of attendees, boards are generally far more motivated by opportunity and actions rather than risks or uncertainties.

My mistake—the 1 in 6 chance and what I’ve been getting wrong

Thus, whilst I hope this was a helpful overview, I haven’t been fully articulating the impact and potential ”sting in the tail.” We discussed planet reality and the potential gaps in the sensitivities during the forum. However, there are two points of context that I hadn’t fully grasped before the Life Conference. The IFoA’s “Climate Scorpion” paper¹¹ references Dr James Hansen’s paper “Global Warming in the Pipeline.”¹² What I’d missed was:

• Firstly, that the most recent Intergovernmental Panel on Climate Change (IPCC) paper estimates an 18% chance (greater than 1 in 6) that a doubling of greenhouse gases would lead to at least 4.5°C degrees of global warming.
• Secondly, that, in effect, we have already doubled the greenhouse gas impact in our atmosphere.

Together that means, given emissions to date, that if net zero is achieved from 2025 onwards, the climate is already due to warm by 4.5°C. The paper goes on to show that, even just assuming a runoff of existing infrastructure, we would reach 8°C to 10°C of warming. So, unless we are radically wrong on the climate impacts of warmer temperatures, then there is at least a 1 in 6 chance I’ve been significantly understating the challenge ahead. If we hypothecate a 1 in 6 chance to Dr Hansen’s paper being correct, it leaves the question back to INEDs, insurers and us all:

If there were a 1 in 6 chance of 8°C degrees of warming, what would you do differently?
What opportunities, calls to action and next steps does it represent?

¹ Copernicus (6 September 2024). Copernicus: Summer 2024 – Hottest on Record Globally and for Europe. Retrieved 23 January 2025 from https://climate.copernicus.eu/copernicus-summer-2024-hottest-record-globally-and-europe.

² Examples of compounding events include severe weather having more rain as well as wind, with risks to river flooding and dam failures. Alternatively, droughts leading to reduced harvests, lower hydro/nuclear energy and supply strains from reduced shipping—all having inflationary pressures.

³ Trust, S. et al. (July 2023). The Emperor’s New Climate Scenarios. IFoA & Universit of Exeter. Retrieved 23 January 2025 from https://actuaries.org.uk/media/qeydewmk/the-emperor-s-new-climate-scenarios.pdf.

⁴ IFoA (14 March 2024). Climate Scorpion – The Sting Is in the Tail. Press release. Retrieved 23 January 2025 from https://actuaries.org.uk/news-and-media-releases/news-articles/2024/mar/14-mar-24-climate-scorpion-the-sting-is-in-the-tail/.

⁵ Integrated assessment models (IAMs) is a generic term for a class of economic models that have been used to model future economic outcomes based on various low-carbon economic transitions and physical climate impacts.

⁶ By 2.0°C warming, six tipping points have greater than 50% probability of occurring and (0.5) ^ 6 < 0.02. Whilst that assumes independence of tipping points, the greater probabilities at 2.0°C are that tipping points such as coral reefs are almost certain at 2.0°C warming, suggesting this is likely to be an underestimate. See https://actuaries.org.uk/media/gebdhxzi/climate-emergency.pdf.

⁷ In broad terms equilbrium climate sensitivity represents the amount of long-term global warming for a doubling of CO2 emissions.

⁸ Laybourn, L. et al. (9 October 2024). The Security Blind Spot: Cascading Climate Impacts and Tipping Points Threaten National Security. IPPR. Retrieved 23 January 2025 from https://www.ippr.org/articles/security-blind-spot.

⁹ Trust, S. (December 2024). Planetary Solvency: Global Risk Management for Human Prosperity. The European Actuary, p. 15. Retrieved 23 January 2025 from https://actuary.eu/wp-content/uploads/2024/11/TEA-40-DEC-1.pdf.

¹⁰ Planetary Solvency: Risks and Recommendations (January 2025). Retrieved 23 January 2025 from https://actuaries.org.uk/document-library/thought-leadership/thought-leadership-campaigns/climate-papers/planetary-solvency-risks-and-recommendations/.

¹¹ IFoA (14 March 2024). Climate Scorpion – The Sting Is in the Tail, op cit.

¹² Hansen, J. E. et al. (2 November 2023). Global Warming in the Pipeline. Oxford Open Climate Change, 3(1), kgad008. Retrieved 23 January 2025 from https://doi.org/10.1093/oxfclm/kgad008.