By Jason Alleyne, FCIA
Walking around Hong Kong, one of the world’s most densely populated cities, seems like an obvious trigger to generate ideas for climate action and sustainability. Reflecting on current and past technologies can underscore how advancements sometimes lead to inefficient practices, however.
For instance, homeowners and store owners deploying air-conditioning systems would once diligently close their doors and windows to ensure that their AC had a decent chance to cool the living or working space.
Nowadays – with more powerful cooling systems – many air-conditioned spaces remain open to the outside air; store fronts cast their doors wide-open, letting the cooled air leak outdoors. The result being that whatever air-conditioning efficiency gains technology provided have been wasted through extravagant overuse.
Introducing the green transition
The green transition, a global shift toward more sustainable practices and technologies, is critical for combating climate change. It involves not only technological advancements but also significant changes in human behaviour and economic systems.
However, this transition faces both the uphill task of reforming existing technology systems away from fossil-fuel-intense energy sources and the monumental task of changing human behaviour.
A recent Economist Intelligent Unit update identified lack of funding as the biggest impact on the pace of the transition. Without any real incentives to transition, either technologically or behaviour-wise, incumbent energy eco-systems will remain the norm. After all, why would builders choose green construction if it costs more and is without immediate benefit? Similarly, why would restaurants switch to plant-based menus if demand doesn’t match associated extra costs? Funding will not flow where there are no economic incentives.
Governments may intervene to create artificial incentives, but green-washing scandals have revealed that green certification can be falsified, especially where it lacks sufficient monitoring.
Where does that leave this initiative?
The United Nations and global political forums have appealed to a higher purpose and the humanitarian spirit, garnering commitments of fund transfers from developed nations to the developing world (which will face most of the hardships of climate change; e.g., Africa, India, China). But unsurprisingly, those promises have been only partially fulfilled at best. Governments around the world are financially stressed and have their own internal country-specific political battles to attend.
At least politicians recognize that funding must flow to where the most intense climate action and impact will occur.
Regardless, proposed emission disclosures and global carbon-tax regimes have yet to be uniformly adopted. One such example is the debate on whether nuclear energy should be considered green; Europe is divided on the issue, while China rapidly expands its nuclear power network.
Additionally, the business of carbon offsets continues to distract from the hard work of transition. In this race against time, time may have an unassailable lead.
Economic policy failures and the need for patient capital
Abhijit Banerjee – who has earned a Nobel Prize in economics for his life work – identified that the most impactful economic-policy failure of the modern era was likely the drastic reduction in marginal income tax rates, from above 70% (pre-1980) to below 40% in developed economies since 1980. This arguably resulted in feeding the twin-headed monster of increased inequality and reduced productivity.
Without any incentive for so-called patient capital, profiteering has spawned innovation in the way that humans consume (social networks and e-commerce) but little new technology for growing the pie.
We need to use the strategies laid out in Banerjee and Esther Duflo’s book Good Economics for Hard Times (2019) – now more than ever.
Opportunities for insurers in the green transition
Considering how patient capital can figure in the green transition, and how we can encourage the major beneficiaries of infrastructure adaptation in this transition, is paramount. In a recent thought-leadership white paper by Aon, a global consulting firm, their executive team opined that insurers have opportunity to invest in the green transition.
Green tech will reduce the risk of environmental hazards and improve the health of the Earth for human life. The life insurance industry and pension funds are the biggest accumulators of investment intended for disbursement in the future, or more than 25 years after origination. These investment pools face direct financial risks from climate change.
In the context of life and health insurance, climate change directly contributes to increased heat-related deaths, extreme weather events, and is a fundamental threat to human health. Additionally, the physical assets backing many bonds and mortgages held by financial institutions may face devaluation or costly repairs due to extreme weather.
Enhancing business practices and investment strategies
Powered by data from PwC, the Fidelity Information Services’ climate-risk financial modeller models asset-value deterioration from climate-related perils. Life and health insurers can benefit from integrating green practices into their business operations and investment strategies.
Insurers can enhance health and wellness programs to promote plant-based diets and invest in insurtech companies within the food-and-beverage industry to improve health outcomes and reduce carbon footprints. On the asset side, investing in green buildings – for example, buildings designed and built with greater structural integrity against gale-force winds and operated with renewable energy systems such as solar, wind, and ground-source geothermal – can mitigate risks and offer future market advantages. There may come a day when investors face class-action lawsuits for the inability to pay pensions due to investments in non-green malls and non-green commercial units today.
As green buildings become more prevalent, they will likely dominate the property market due to their marketability and liquidity, like how electric vehicles have transformed the automobile industry over the past two decades. IoT systems used in these buildings can provide real-time data on efficiency and usage, further supporting green-investment strategies.
Where to go from here
Two pieces of the puzzle are glaringly missing:
- An agreed playing field for the monetary value of choosing to reduce carbon-related externalities, whether in the form of a tax or system-wide evaluation of risk-based contingency funds or a hybrid of the two;
- An accepted profession that can certify the quality of a green project, including its veracity, integrity, universality, and comparability, and establish what constitutes an unambiguously green project.
On the first point, carbon-tax systems are often favoured for their straightforward appeal compared to traditional economic methods. However, finance uses a different approach: risk-based capital. In banking, businesses face rewards or penalties, based on their risk profiles, reflected in the size of their contingency reserves. Higher risk leads to greater reserve requirements, increasing the frictional cost on profits.
Similarly, in the green transition, the various actors (namely the holders of patient capital insurers and pension plans, or whomever invests in unambiguously green projects) should face less frictional cost on their emerging investment returns. Only when there is a real incentive such as reduced contingency reserves (and reduced frictional costs) will investors change their investment allocations.
But what can we say about this caveat for certifying which projects are “unambiguously green”?
The emerging role of the green certification actuary
As the green transition progresses, the effective management and verification of data become crucial for transparency and accountability. Green technologies and their impact must be accurately measured to drive meaningful progress, and actuaries are becoming increasingly important in this process, providing oversight to ensure data accuracy and assessing the financial implications of green investments.
In response to the growing demand for reliable data in green technology, a new role is emerging: the green certification actuary. This professional ideally works alongside chief actuaries to address specific aspects of green data management. The green certification actuary would typically be responsible for:
- Certifying data quality: ensuring the accuracy and reliability of data feeds related to green technologies.
- Validating green certifications: verifying the “green quality” of projects, including the legitimacy of carbon credits associated with green initiatives.
- Assessing environmental footprint: evaluating the environmental impact of projects, assets, and investments.
This new role is essential for maintaining rigorous standards in data integrity and financial assessment, supporting the credibility of green initiatives in the insurance and pension industries. The green certification actuary will play a crucial part in bridging the gap between data accuracy and financial oversight, contributing to the successful integration of green technologies into our economic systems.
Learning from China’s experiences
According to the Economist Intelligence Unit, China (along with Africa and India) faces significant risks from climate change. With 60% of the global population and many developing economies exposed to these risks, China’s experiences offer valuable lessons for others, including Canadian actuaries and industry professionals.
China’s advancements in technology have enhanced its food-production and logistics systems, enabling the efficient and inexpensive delivery of products, including convenience foods produced by large-scale systems to any location at any time.
However, this rapid technological progress has led to the rapid rise of impaired health at an alarming scale, being linked to a rise in health issues such as reproductive issues, insulin resistance, diabetes and other metabolic syndrome illnesses, including many cancers. Additionally, the country’s accelerated infrastructure development has sometimes promoted speed over quality, contributing to recent incidents of road and bridge collapses in southern China due to flooding or landslides.
“As China works toward addressing these challenges, its approach offers insights for Canada’s own climate and infrastructure strategies.”
For example, the Healthy China 2030 initiative emphasizes transitioning from medical treatment to proactive disease prevention, with a focus on food as medicine. This approach underscores the importance of improving food supply-chain security and health outcomes.
Similarly, in the wake of the bankruptcy of Chinese property developer Evergrande, there is a notable shift toward integrating green-building principles in future infrastructure projects. This shift highlights the necessity for sustainable and resilient construction practices.
For the life insurance industry, many of China’s insurers stand at an important crossroad due to underperformance in their investment portfolio. Rapid growth fuelled by private funds and low-barrier licensing policies has led to a need for a more rigorous approach to solvency and regulatory oversight. This serves as a reminder for Canadian actuaries to consider how their industry might adapt to these emerging challenges and opportunities, so they can effectively support patient capital and sustainable investments.
By learning from China’s approach to these issues, Canadian actuaries can better prepare for the evolving demands of climate response and infrastructure development, and contribute to a more resilient and forward-looking industry.
Embracing the actuarial opportunity in the green transition
The green transition needs funding from investors with patient capital who stand to benefit most from the reduced risk of climate adaptation and improved resilience. Insurers – whose businesses improve when risk is reduced – and pension plans are uniquely positioned to be providers of capital for this shift. Consequently, the actuarial profession has significant opportunity to lead in data analysis and to serve as trusted adjudicators of the quality of green technologies in the transition.
As global climate risks become more pronounced, particularly in China and the Asia-Pacific region, Canadian actuaries can draw lessons from these areas. The heightened risks faced by these regions underscore the need for actuaries worldwide to get involved and enhance their skills toward leading the green transition.
“By leveraging their expertise, Canadian actuaries can play a pivotal role in guiding investments and innovations that will drive the green transition forward.”
This involvement not only positions actuaries as key players in addressing climate challenges but also ensures that their contributions are aligned with global best practices and emerging trends.
Embracing this opportunity will not only enhance the resilience of the Canadian financial sector but also contribute to the broader global effort to combat climate change and build a sustainable future.
This article reflects the opinion of the author and does not represent an official statement of the CIA.
Jason Alleyne, FCIA, is the Head of Greater China for Aon Life Solutions, where he leads PAR fund management, ALM and investment strategy and insurance innovation across Hong Kong, Mainland China, Taiwan, and Macao. He also leads Aon’s life solutions practice on climate risk.
With a deep focus on sustainability and climate action, Jason leverages his expertise in life insurance consulting to optimize product portfolios and guide clients through the green transition. Based in Hong Kong, Jason is committed to enabling growth while promoting environmental responsibility.
Jason was featured on Seeing Beyond Risk to share his insights on the actuarial role in addressing climate issues through green housing.
