Better tools needed to drive climate action investment: actuaries

Tools and measures relied upon to make investment decisions on climate change adaptation spending are not adequate in the current environment and new approaches are urgently needed, the Actuaries Institute summit heard today.

Taylor Fry Director and Climate Change Working Group member, Ramona Meyricke says both government and the private sector will need to step up and make decisions as potential costs from inaction increase.

Ms Meyricke told the summit that in many cases investments will need to be co-funded but challenges include that the private and government sectors have different areas of focus and tend to view adaptation and interpret resilience differently.

“It is really critical that we develop forward looking tools to make climate adaptation decisions that enable both perspectives, that allow for both sets of costs, and that make sense to both the public and private sector,” she said. “Current tools and measures aren’t fit for purpose.”

Ms Meyricke says inadequacies include using backward looking one-in-500-year event probabilities to make decisions, while social and non-financial impacts are often left out of analyses despite comprising the majority of costs.

The summit heard that the Actuaries Institute climate risk research group is exploring different methods and the potential to combine various tools to provide a more effective approach that can encourage investment.

Options include a multi-criteria analysis that takes account of financial and non-financial criteria and which can analyse a wider range of data.

Working group member and IAG natural peril pricing team actuarial consultant Sylvia Wang says traditional cost benefit analysis (CBA) shortcomings can include underestimation of extreme event impacts.

That methodology is very sensitive to discount rates, particularly over a long-term horizon, and a lot of projects still evaluate cost-benefits based on current climate scenarios without factoring in changes, she says.

“Cost benefit analysis is a common method but it has limitations, therefore alternative frameworks need to be looked at on top of CBA to consider the uncertainties, to incorporate sensitivity tests and to measure intangible benefits,” she told the summit.