The heat is on 17 Jul 2019 10:54 Esko Kivisaari The hot summer has kept us concerned over what is happening to our climate. The Chief Risk Officer Forum has published an excellent study (The heat is on – Insurability and resilience in a Changing Climate) on what to expect from the future. For actuaries I also recommend the Actuaries’ Climate Index. The Actuarial Association of Europe (AAE) is currently finding out if we could create a European version of this index. The sad truth about climate change is that we are still on the path to a global temperature increase of 3-4 degrees. If this happens it will have catastrophic consequences in many areas. We have the Paris accord and after that the IPCC report of last autumn pointing to a way of limiting the temperature increase to 1.5 degrees Celsius. There are realistic chances of achieving this. We should do whatever it takes in order to leave the globe in a reasonably good condition for the next generations.The EU has its agenda on sustainability. Mitigating climate change and adapting to its consequences is a significant part of this agenda. We have the concept of ESG, where E means environment, S means society and G means governance. Climate change is included in the environment section as one of the most urgent areas, although also for example the loss of biodiversity is among the most pressing concerns.Last week the Commission published guidelines on climate-related information reporting as part of the Sustainable Finance Action Plan. In practice they are new additions to the existing guidelines on non-financial reporting. The new guidelines provide practical recommendations on reporting for example on what impact the activities of an insurer has on the climate, as well as the impact of climate change on the insurer’s business. The EU activities are more extensively described in the AAE newsletter.The Commission has also set up the Technical Expert Group on Sustainable Finance, taking forward the recommendations of the corresponding High Level Expert Group of 2017. The mandate of the expert group has been extended until the end of this year. However, the expert group published its interim reports in June. In a nutshell, the current recommendations say the following:The proposal on the taxonomy gives an implementation tool that can enable capital markets to identify and respond to investment opportunities that contribute to environmental policy objectives. It provides also practical guidance for policy makers, industry and investors on how best to support and invest in economic activities that contribute to achieving a climate neutral economy. In other words, the taxonomy is a dictionary to design and construct portfolios and understand the exposures to different asset classes.The proposal for an EU Green Bond Standard produces a revised version of the EU GBS, including a section on the expected impact of the EU GBS, as well as a template for the green bond framework. In particular, by linking the GBS to the taxonomy, it will determine which climate and environmentally-friendly activities should be eligible for funding via an EU green bond.EU climate benchmarks include technical advice on minimum disclosure requirements to improve transparency and comparability of information across benchmarks on climate-related information and ESG indicators.EU actions in sustainable finance are important for everybody, but actuaries can play a leading role in many areas. We are strong in modeling uncertain events and we can provide important input to the processes. We must also be careful in not sacrificing our core competences for the wishes of different interest groups. We need, in our professional role as actuaries, to keep calm and provide our input in the areas where we have the competence.When it comes to the EU we can also say that it is strong in financial regulation while it has weaknesses in some other areas, like taxation or subsidies. We need to recognize that finance can do only so much and it cannot change everything. Minced meat might cost less per kilogram than veggies in the supermarket, even though the meat must have required many kilograms of veggies to produce. Finance alone cannot change that and actions in other areas are also needed.