Risk of Planetary Insolvency due to Climate and Nature crises. What does this mean for our region?

A guest blog by Darcy White

A new report, using more realistic ways of assessing the financial risks of environmental breakdown, has dramatically changed predictions and says that urgent action is desperately needed if we are to avoid catastrophe.

The report, by risk management experts at the Institute and Faculty of Actuaries (IFoA), says that we risk “planetary insolvency” as global economies hurtle towards a 50% loss of Gross Domestic Product (GDP) between 2070 and 2090 due to “catastrophic shocks of climate change”. 

Actuaries model the financial implications of risks – in this case the risks associated with environmental crises such as flooding, fires, droughts, temperature rises and loss of biodiversity and biomass. 

Key findings

“Without immediate policy action to change course, catastrophic or extreme impacts are eminently plausible, which could threaten future prosperity.” 

Using a traffic light system to symbolise its findings, the report concludes that we are currently at AMBER for both “climate change” and “nature”, but the direction of travel is RED. The authors argue this is because our politicians currently use misleading predictions about climate change, based on out-of-date models, and therefore fail to make the changes necessary to tackle environmental breakdown. Alarmingly, such predictions take no account of the economic impacts of tipping points, extreme weather events, sea level rise, impacts on human health, forced migration and resource-driven conflict and geopolitical tension. 

The IFoA report was published in January in response to the fact that for the first time the average global temperature for the previous 12 months was 1.5°C above pre-industrial levels. This breaches the Paris Agreement, and risks triggering multiple climate change tipping points.

The report shows that “risk impacts today are becoming Severe” and “the trajectory is concerning, with Catastrophic to Extreme impacts Likely or Highly Likely by 2050”, causing over 4 billion deaths, significant societal breakdown, state collapse and extinction events.

Policy makers focus on the economy but fail to recognise that it is dependent on the earth’s systems. The authors warn that “climate change and nature loss, driven by human activity, threaten the stability of the Earth system”.  We need to “manage our activity to be within planetary boundaries”. The report calls for “urgent policy” to achieve this as our “current market-led approach to mitigating climate and nature risks is not delivering”.

Economic implications

This report addresses the economic implications of climate breakdown in terms of GDP loss. If such a decline is not carefully planned, this would lead to loss of jobs, tax revenue and welfare. The effects of extreme climate events are being felt in profoundly material ways. But perhaps we haven’t, until now, been sufficiently conscious of the wider economic impacts and difficulties faced if our houses and business properties become uninsurable due to such factors.

We are all aware of the effects of extreme climate events across the world: catastrophic flooding experienced in Valencia, wildfires burning out of control in Los Angeles, and the global threats to food supplies caused by drought. Sheffield was famously hit by floods in July 2007, and in November 2019 over 750 properties were flooded in the Doncaster area, with Fishlake suffering the worst with 90% of homes breached by dirty water. There have already been over 30 moorland fires in our region this year.

Political economist Richard Murphy, Emeritus Professor of Accounting at Sheffield University Management School, warned this week that “climate change is making many houses uninsurable” as “major re-insurers are pulling out of supplying insurance” in some of the riskier markets. Murphy warns that “basic household insurance is no longer available to many people”, noting that places in Doncaster “can’t get cover”.

The UK Environment Agency say 1 in 6 houses are now at risk of flooding; describing Yorkshire as “hit badly”. And, as Murphy warns, “our drainage systems just aren’t up to taking water away”. 

This situation is having a terrible effect on people’s lives. “Households are becoming trapped in their homes”. A house can’t be sold if it is uninsurable, and this represents a “totally systemic risk for the banking industry” that could lead to “financial crisis”.

What can we do?

We need to build flood defences and stop building on floodplains. But more fundamentally, Murphy argues that we need to “transform our economy” in a way that recognises the “risks that climate change creates”. We are all aware of the need to phase out fossil fuels. To achieve this, we must reduce production and consumption of goods and services “especially those consumed by the wealthy”. “The time for an airline tax has arrived … there’s no excuse for excess global travel for leisure”. 

Coming back to the IFoA report, in my view it is wholly incorrect to simply think about “planetary insolvency” as a side effect of climate change. On the contrary, the economic system is driving climate change and other environmental hazards. The whole thing is entangled. It doesn’t make sense to have to bear the eye-watering costs of repairing what has been destroyed through over-production and consumption. Far better to tackle the fundamental problem. To address the root cause of planetary breakdown we need to reduce GDP growth imperatives, and that does require fundamental change in the way our economy functions.