The FTSE All-Share Index, originally known as the FTSE Actuaries All Share Index, along with the FTSE 100, represent nearly all of the market capitalisation and the top 100 companies by size listed on the London Stock Exchange respectively. They are mentioned in all BBC news bulletins. When they go up, we all feel better. When they go down, they are seen as portents of doom.

Let me show you a different actuaries’ index instead:

Figure 1 shows the ACI and each of the components. The composite ACI represents the average of the six components (with sign of change in cool/cold temperatures reversed). The ACI is increased by reduction in cold extremes, consistent with increased melting of permafrost and increased propagation of diseases, pests, and insects previously less likely to survive in lower temperatures. A positive value in the ACI represents an increase in climate-related extremes relative to the reference period.

The threat of climate change is real, independent of speculative trading and the news media cycle, and increasing with each degree of warming we are unable to stop. Alongside this are the increasing risks of extreme weather events, which is most neatly described for North America currently by the Actuaries Climate Index. This focuses on six components in particular which have the most impact on human societies:

  1. Frequency of temperatures above the 90th percentile (T90);
  2. Frequency of temperatures below the 10th percentile (T10);
  3. Maximum rainfall per month in five consecutive days (P);
  4. Annual maximum consecutive dry days (D);
  5. Frequency of wind speed above the 90th percentile (W); and
  6. Sea level changes (S).

It then tracks them all over time, as shown in the graph above.

It seems clear to me that we should be reacting much less to the booms and busts of economic cycles and much more to climate-related threats. This is for two main reasons:

1. More people are at threat of death or injury as a result of climate change than even the 2008 crash in our financial systems. The World Health Organisation (WHO) predicts that, between 2030 and 2050, climate change is expected to cause approximately 250,000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress. However, the additional deaths are already here. Taking just two examples from the WHO:

  • In the heat wave of summer 2003 in Europe for example, more than 70,000 excess deaths were recorded, with the frequency of such events steadily increasing.
  • Globally, the number of reported weather-related natural disasters has more than tripled since the 1960s. Every year, these disasters result in over 60,000 deaths, mainly in developing countries, which means that 40,000 of those deaths pa can already be directly attributed to climate change.

On the other hand, the 500,000 additional cancer deaths and 10,000 additional suicide deaths since 2008 cannot be attributed directly to the 2008 crash, as the analysis shows. These are more a result of the austerity policies which have been applied since 2008. Unnecessarily.

Climate change on the other hand does not care whether we react to it or not. It will relentlessly change the chemistry and biology of everything around us as the Earth and the inhabitants of the Earth adapt. We may survive it, in reduced numbers, or we may not. The Earth does not care. Responding to the threat will not make more climate-related events happen unless our response is to, by and large, ignore it.

2. One depends on the other. We cannot base our economies on a FTSE-led GDP-growth-at-all-costs model because it is not physically possible to maintain it without losing the environment from which our growth originates. As Finbarr Livesey points out in his excellent From Global to Local, the circular economy which the overwhelming consensus of studies show would increase employment and contribute to economic growth is taking a long time to arrive. In Europe, where we consume around 16 tonnes of stuff each per year, figures from Siemens in 2016 suggest that 95% of it and its energy value is lost through the life cycle of the products themselves.  As Kate Raworth  and others have pointed out, we need to focus on different measures of success if we are going to direct our economies in a more sustainable, less volatile and doom-laden direction.

There are plans to extend the Actuaries Climate Index to Europe (including the UK in this instance!), with a recent feasibility study concluding “that the prospects for constructing an analogue to the Canada-US ACI over the European region are promising”. I hope we see such an index soon, because, as Randall Munroe illustrates here, we have not been here before.

I look forward to the day when a new global actuaries’ climate index is on every news bulletin, making us feel better when it goes down and seeing any rise as a portent of doom. Because this time it really would be.

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Great infographic from summarising the likely impacts of each additional degree in warming which I thought was definitely worth sharing!


Global Warming Scenarios

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The Institute and Faculty of Actuaries (IFoA), through its Actuarial Research Centre, is inviting research teams and organisations to submit proposals for a research project on modelling pension funds under climate change. The research is intended to address the need for pensions actuaries to understand the potential magnitude of climate change impacts, and hence if and when climate change might be relevant to the funding advice they give. What areas in particular might be useful to look at through the lens of a pension actuary?

The current concentration of carbon dioxide in the Earth’s atmosphere is around 400 parts per million by volume (ppmv), or a little over 140% of the generally accepted pre-industrial level of 280 ppmv. What level we can cap this at depends on how we respond in every country in the world. There are therefore many opinions about it:

Source: IPCC AR5: Fig 2.08-01 

Here RCPs stand for Representative Concentration Pathways, and are meant to be consistent with a wide range of possible changes in future anthropogenic (i.e. human) greenhouse gas emissions. RCP 2.6 assumes that emissions peak between 2010-2020, with emissions declining substantially thereafter. Emissions in RCP 4.5 peak around 2040, then decline. In RCP 6.0, emissions peak around 2080, then decline. In RCP 8.5, emissions continue to rise throughout the 21st century. What this means is that the best we can hope for now is a scenario somewhere between RCP 2.6 and RCP 4.5, with the US Government’s Environmental Protection Agency appearing to believe that RCP 6.0 is the most realistic scenario. As you can see, RCP 4.5 assumes an eventual equilibrium at around 500 ppm, or about 180% of pre-industrial levels and RCP 6.0 an equilibrium at around 700 ppmv, or about 250% ppmv.

Equilibrium climate sensitivity is defined as the change in global mean near-surface air temperature that would result from a doubling of carbon dioxide concentration. A doubling of the pre-industrial level to 560 ppmv (ie between the RCP 4.5 and RCP 6.0 assumption) has been projected to result in a range of possible outcomes:

Source: IPCC 2007 4th Assessment Report, Working Group 1 (Figure 9-20-1)

This is certainly a bit of a we know zero kind of graph, but has worryingly fat tails indicating reasonable chances of 10 degrees plus added to average global temperatures. To put this in context, let’s use the approach taken in Mark Lynas’ excellent “Six Degrees“, where the combined research into the effects of each additional degree above pre-industrial global temperatures is collated to allow us to view them as distinct possible futures. Some examples are as follows:

One degree

We are nearly here (around 0.8ᵒ so far):

  • Return of the “Mid-west American dust bowl” but with greater vengeance
  • Increase in hurricane activity
  • Loss of low lying islands, eg Tuvalu

Two degrees

The “safe” level we are trying to limit increases to:

  • Release of greenhouse gases begin to alter the oceans. May render some parts of southern oceans toxic to Ca CO3 and thus to one of life’s essential building blocks, plankton.
  • Heatwaves like 2003 which killed 35,000 people in Europe and led to crop losses of $12 billion and forest fires costing $1.5 billion will occur almost every other summer.
  • Crippling droughts can be anticipated in Los Angeles and California
  • From Nebraska to Texas the anticipated drought would be many times worse than the 1930s “dust bowl” phenomenon.
  • Polar bears would probably become rapidly extinct.
  • Mediterranean countries will become drier and hotter with significant water shortages.
  • IPCC estimate sea level rise of 18 to 59 cms.
  • Monsoons would increase in India and Bangladesh leading to mass migration of its populations.
  • International food price stability will have to be agreed to prevent widespread starvation.

Three degrees

  • Africa will be split between the north which will see a recovery of rainfall and the south which becomes drier. This drier southern phase will be beyond human adaptation. Wind speeds will double leading to serious erosion of the Kalahari desert.
  • Indian monsoon rains will fail. ·
  • The Himalayan glaciers provide the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers. In the early stages of global warming these glaciers will release more water but eventually decreasing by up to 90%. Pakistan will suffer most, as will China’s hydro-electric industry.
  • Amazonian rain forest basin will dry our completely with consequent bio-diversity disasters
  • Australia will become the world’s driest nation.
  • New York will be subject to storm surges. At 3° sea levels will rise to up to 1 metre above present levels.
  • In London, a 1 in 150 year storm will occur every 7 or 8 years by 2080.
  • Hurricanes will devastate places as far removed as Texas, the Caribbean and Shanghai.
  • A 3° rise will see more extreme cyclones tracking across the Atlantic and striking the UK, Spain, France and Germany. Holland will become very vulnerable.
  • By 2070 northern Europe will have 20% more rainfall and at the same time the Mediterranean will be slowly turning to a desert.
  • More than half Europe’s plant species will be on the “red list”
  • The IPCC in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates. US southern states worst affected, Canada may benefit. The IPCC reckons that a 2.5° temperature rise will see food prices soar.
  • Population transfers will be bigger than anything ever seen in the history of mankind.

Three degrees obviously needs to be avoided, let alone ten, but the problem is that business as usual for the finance industry may not be the way to get there. As some recent research has suggested, financial market solutions to environmental problems, such as carbon trading, may be ineffective. As the authors state: By highlighting the tenuous and conflicting relation between finance and production that shaped the early history of the photovoltaics industry, the article raises doubts about the prevailing approach to mitigate climate change through carbon pricing. Given the uncertainty of innovation and the ease of speculation, it will do little to spur low-carbon technology development without financial structures supporting patient capital.

Patient capital is something developed economies have been seeking for some time, whether it is for infrastructure investment, development projects or new energy sources, and no good way to create it within the UK private sector has been found yet, including various initiatives to try and get an increase in pension scheme investment in infrastructure projects. It therefore seems to me to be the wrong question to ask what impacts climate change are likely to have on the assumptions used for pension scheme funding, when it is the impact of the speculation which pension scheme funding encourages which is one of the main drivers of our economies towards the worst possible climate change outcomes.

A more productive research question in my view would be to bring in legislators and pensions lawyers as well as environmental scientists and others researching and thinking in this area alongside actuaries to look at how we could change the regulatory framework within which pension scheme funding and investment within other financial institutions where actuaries are central takes place. There is already research into what changes may be necessary to international law to reflect the new Anthropocene era the planet has entered, where the dominant feature is the impact of human activity on the environment. In my view this should be extended to the UK legislative and regulatory landscape too.

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