FRC proposes new requirement for actuaries to consider ESG-related risks

The Financial Reporting Council (FRC) has issued a consultation on new requirements for actuaries to consider climate change and ESG-related risks in their calculations.

The FRC said there was concern that many actuarial practitioners are not adequately considering non-traditional risks, such as climate change, in their work.

As a result, a proposed change to Technical Actuarial Standard 100 would include a new requirement to ensure actuarial practitioners "have regard to all material risk, including the consideration of climate change and ESG-related risks", which may affect, or have the potential to affect, their technical actuarial work and which the practitioner might reasonably be expected to know about at the time of carrying out the work.

Feedback gathered by the FRC has shown that non-traditional risks such as climate change and other emerging risks are less well-considered by actuaries at present.

"Looking forward, actuaries are likely to become more involved in areas such as climate change and pandemic modelling, and the use of data science is becoming more prevalent," said the consultation paper.

"Actuaries are increasingly working in multidisciplinary teams to develop and use models. All of these trends increase the importance of model governance, including control of the model environment, model validation, and communication of results.

"Although the International Actuarial Association (IAA) has developed additional practices to improve modelling, the FRC is considering whether the data, assumptions and modelling principles continue to remain appropriate and sufficient — particularly in light of the need to analyse climate change and ESG-related risks. Standards at present do not contain details on how requirements should be met and "leave room for actuaries to exercise their own judgements".

The FRC said that this has worked well to date with modelling techniques, but believes that revisiting some areas may be useful. In particular, it wants to examine the communication of complex models, the consideration of the limitations of some models, testing around material assumptions, and the use of interactive models developed for self-service advice.

The body believed that compliance with the newly-proposed principle should not present "significant challenges" for the practitioners who are already compliant with the "spirit" of the principle. "However, it is recognised that compliance with the principle will add to the ongoing work of practitioners who do not currently consider these non-traditional risks in their work," said the paper.

FRC executive director of regulatory standards, Mark Babington, added: “Actuaries have a key role to play in considering risks and modelling of future events so that users of actuarial information can make informed decisions about material risks.

"As the importance of climate change risks continues to grow it is critical that actuaries consider these risks in the course of their work. The proposed amendments to TAS 100 are designed to ensure actuarial work remains fit for purpose within the rapidly changing environment in which actuaries operate.”

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