When it comes to climate, the tail [risk] really is wagging the dog

Recently a paper was published by people who study risk for a living - “Actuaries”. The paper, titled ‘Climate Scorpion – The Sting is in the Tail’, puts not only systemic economic solvency under the spotlight, but also the solvency of all systems on which we rely, what they call “planetary solvency”. That means that all of our efforts (individual as well as communal) to ensure a stable and predictable economic future, for ourselves, our families and our countries, whether through our jobs, investments, pensions or inheritance, will all be at risk.

The Scorpion’s Tail report raises the alarm about the urgent need to account for “tail risks” and what it could mean to each of us personally, as well as our economic system as a whole. There’s no spin here - our economy and civilization simply weren’t designed for the planet’s rate of rapid heating, and as “tail risk” events become more common (occuring every year or two), the system is starting to show its fragility. But what’s even more alarming is what is on the way. The next wave of extreme “tail risk” events, which are expected to be more massive and impactful than anything we’ve ever seen - are at our doorstep - and with ecosystem degradation accelerating, these new extreme impacts will quickly become our annual reality. The clock is ticking and we have no time to lose - we need to come to terms with the fact that our traditional business risk management tools are woefully inadequate to deal with the magnitude and global scale of climate change.

For those who aren’t familiar with the term “tail risk”, it refers to the possibility of extreme events that, while rare, can have catastrophic impacts on financial markets, investments or other systems. These are events like extended heatwaves, forest fires, floods and droughts that strike just once in a 100 years - at the edge of the probability curve.

Risk of ruin 

The continued omission of “tail risks” from our climate models not only poses a threat to market stability and asset valuation but it has the potential to bring our entire economic system to its knees. The authors of the Scorpion’s Tail refer to this as the ‘risk of ruin’ - the point beyond which our global society could no longer successfully adapt to climate change. 

But wait, could this just be more fear mongering from overzealous climate activists? Maybe the sky isn’t falling and we just need to stick to the plan, double down on “green growth” and not get caught up in all this “tail risk” doomerism talk. After all, that seems to be the consensus of most of our global political and business leaders. But what if (as the science indicates) there is indeed a high likelihood that “tail risks” are a valid concern and that we’re already well on our way to an economic and planetary disaster? 

Let’s revisit what the people who study risk for a living have to say. 

The Scorpion’s Tail report states that based on our current trajectory and our remaining carbon budget, “an overshoot of the 1.5°C temperature goal by 2030 is increasingly likely and current net zero carbon budgets give a low probability of limiting temperature.” But this is pretty dry language, so let’s plug in the percentages and use the actual words of the actuaries from the Scorpion's Tail report to bring the point home:

“...a 50% chance of success also means a 50% chance of failure. Likewise, a 66% or two-thirds chance of success means a third chance of failure, that’s twice as high as the chances of losing at Russian Roulette, a game few would choose to play, even for a significant reward.” (source)

Ask yourself…are you comfortable with trusting your pension or savings to an insurer who’s engaging in a system that offers you a 50% chance of ruin? Are you comfortable with a financial and insurance sector that risks becoming insolvent because it was built for a world that no longer exists?

Dangerously unprepared

Our economic system may seem resilient but if you throw a few “1 in a 100 year events” at it - it becomes quite clear, very quickly, that we are dangerously unprepared. The 4 pillars of our economic system that rely on consistency and predictability - Insurance, Investments, Pensions and Banking - cannot survive in this new reality. And it won’t take long for us to fall into full scale planetary insolvency.

In a climate-changed future, words like retirement, travel, dream home and inheritance will be replaced with words like; climate-induced structural inflation, insecure housing, widespread crop failure, water shortages, sacrifice zones and mass migration.

Still too risky

Financial sector professionals need to quickly appreciate just how vulnerable their sector, in particular, is to tail-risk-induced-insolvency, and what this means to their own jobs and their own standard of living. The financial sector must bring the concept of “tail risks” into the mainstream conversation.

But there’s a problem.

Leaders in this sector have told us that it would be far too risky for their personal and professional reputations to stray too far from the accepted mainstream “pro-green-growth” narrative to discuss the potential of widespread economic insolvency. And so, despite the urgency, these conversations are still being held in silos, away from the crowd, with just one or two trusted colleagues where they can feel safe to share their unfiltered beliefs. You can read more about this in our previous article,  “Hey, I’ve got something we need to talk about - but I don’t want anyone to hear”.

What we’re left with at mainstream events, after the headline speakers and other thought leaders have spoken through their “self-imposed muzzles”, are presentations about the current climate threats and the usual thoughts about what are essentially “Business as Usual” (BAU) solutions about how to prepare and cope with the new and more intense climate destruction. This is a clear example of how sometimes, inaction can be just as dangerous as taking the wrong action. 

There’s an urgent need to discuss the actual design of a system whose very success, ironically enough, is also the greatest threat to its own continued viability.

3 laws For business

Imagine if there was a way to tackle “tail risk” while still allowing business to profit and flourish without destroying ourselves in the process. Imagine if the system for global commerce had "economic guardrails" to ensure long-term sustainability and profitability while simultaneously preventing business from undermining the viability of the very systems upon which it depends. Imagine if in the same way that in 1942 Science Fiction writer Isaac Asimov created the 3 laws for robotics to ensure that humans don’t create something that can destroy us, there were 3 laws of business with the same goal - to prevent our own destruction.

To solve this challenge, along with having a safe place for these “insolvency” discussions to occur, Climobilize is launching “The Scorpion's Tail Club” - an exclusive by-invite-only forum where “tail risks”, the threat of mass insolvency and actionable steps (including the creation of policy papers and supporting draft legislation) can be safely discussed - without any risk to one’s personal or professional reputation.

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