Bridging climate science, financial risk and real-world decisions

Turning Insight into Action – is the challenge at the heart of climate finance. We are not short of analysis or models. The real test is translating insights into how capital markets work.

I want to connect those discussions to four pillars of Carbon Tracker’s work – each illustrating how insights become actionable signals.

Loading the Dice: Science-informed damage functions 

One of the great puzzles in climate economics is the gap between climate scientists (who warn of tipping points, cascading feedback, non-linear impacts etc) and many integrated assessment models (IAMs) that produce relatively mild damage curves.

To address this, Carbon Tracker partnered with Exeter University to design a new, science-informed damage function for IAMs. We surveyed over 1,000 climate and social scientists about their expectations for economic damages from different warming pathways.

The initial results suggested that scientists expect far greater damages – and more non-linear risks – than most IAMs currently represent. When you load this into the models, GDP losses could reach 20–25% or more by the end of the century end under high-warming scenarios. The market is pricing in 50% GDP destruction by 2050 if 3 degree is breached.

Action

We have socialised this work with pension funds across the UK, their consultants and most recently at a high level roundtable this summer in Norway, with the Oil Fund and the Government of Norway, with positive feedback.

Role for Actuaries

• Update scenarios for pensions, life, and health liabilities to reflect more aggressive climate damage tail risks, including for consideration in forward asset valuations and factor in climate risks in companies risk register if they are not already there.
• Reassess discount rates, reserve cushions, reinsurance loadings to better internalise low-probability, high-impact climate outcomes.
• Build “tipping zones” into stress test rather than assuming linearity across all scenarios.

The objective is to turn insight into actionable stress frameworks and pricing adjustments.

However, we face headwinds. Some actuarial bodies, including in the UK, have advised against including tipping points in official scenario analysis. That runs counter to the precautionary principle applied in other areas of catastrophic risk.

Ignoring tipping points won’t make them disappear. It only leaves the financial system unprepared when they arrive.

Role for investors

• Challenge consultants and asset managers who underplay tail risks.
• Integrate higher-damage scenarios into portfolio stress testing.
• Price systemic climate shocks as seriously as you do financial crashes.

The trick I know, is on the timeframe. Trustees need to consider the relevance of long-term impact of portfolios beyond their term.

Decommissioning Liabilities 

Our work on Asset Retirement Obligations (AROs) has shown that oil and gas companies are under-provisioned for dismantling and capping wells, pipelines, and related infrastructure.We estimate that in the U.S. alone, first-order costs to decommission existing infrastructure may exceed US$1.2 trillion, and globally the scale may be multiple times that.

This is not just a corporate accounting issue. It is also a public finance issue. When companies under-provide, the ultimate backstop is often state and municipal governments. That means taxpayers, and ultimately municipal bond markets, are the lenders of last resort for plugging orphaned wells and managing environmental clean-up.

One compelling impact story: in the report Rocky Mountain Highs and Lows, focused on Colorado, with estimated decommissioning cost at $4–5 billion, whereas projected future cash flow from those wells is only about $1 billion.

Similarly, our analysis shows that California’s onshore oil sector sits on at least US$13 billion in closure and cleanup costs. Yet the industry has only provided $106 million in financial assurance – less than 1% of the estimated liability. The state and federal taxpayers already cover $265 million inherited costs.

Action

• Regulators from Colorado and California are tightening bonding rules, considering financial assurance reform, or stricter transfer rules for oil assets.
• Carbon Tracker has proposed pooled remediation funds and securitised cleanup bonds.

Role for actuaries

• Build more robust models around decommissioning liabilities – considering timing, tail risk, political/judicial shifts.
• Stress-test balance sheets and pension exposures.
• Design pooled remediation funds or insurance-like structures to spread the clean-up risk.

When actuaries participate in those structures, insight about stranded or orphan wells becomes a mitigated liability – turning insight into risk-reduction.

Role for investors

• Demand full disclosure of AROs.
• Price underfunded companies as having higher credit and equity risk.
• Engage with regulators and boards to require realistic provisioning.

Atmospheric Viability Test: Connecting IPOs to Carbon Budgets 

Carbon Tracker’s Atmospheric Viability Test proposal, working jointly with ClientEarth, ask a simple question: is new capital-raising for fossil ventures consistent with a finite carbon budget? In other words, should the market be underwriting new fossil capacity when those assets may never be burned in a Paris-aligned scenario?

By mapping planned or new issuances to carbon budgets, we reveal that many fossil IPOs effectively invite investors into stranded asset risk.

Action
One practical use has been in due diligence by institutional investors assessing fossil capital raises. Carbon Tracker’s Stranded Exports work shows how Export Credit Agencies (ECA) are underwriting overseas oil & gas despite oversupply risk under transition scenarios.

By combining viability tests and ECA analysis, we encourage pushback on underwriting norms. In some cases, investor groups have become more cautious in supporting new fossil IPOs unless the carbon alignment is clearer.

Role for actuaries and investors

• Apply the viability test in due diligence and make decisions accordingly.
• Ask: is this investment viable in a net-zero world?
• Mobilise with the financial regulator, the FCA, to make carbon budget stress-testing a requirement for fossil IPOs

By doing so, capital allocation itself begins to internalise climate constraint – not just post facto risk.

CTI-PALEM and Transition Finance: Accelerating Coal Phase-Outs Insight (Financing transition)

Power Asset-Level Economics Model

While most analysis asks how much coal costs us, CTI-PALEM (Palem) goes further: it quantifies the cost and benefits of transition finance to accelerate coal retirements. In essence: what is the price of speeding up closure, and how does that compare with continued climate damage and capital substitution? It’s designed to assess the financial viability of individual coal-fired power plants and identify when each one is likely to become uncompetitive relative to clean alternatives.

PALEM is an asset-level, bottom-up financial model that estimates the marginal cost of generation (LCOE) and cashflow profiles for every coal unit. It simulates how changing fuel prices, carbon prices, and renewable energy costs affect plant profitability.

It integrates plant-level technical data (capacity, efficiency, age, location, technology type) with economic parameters (fuel cost, carbon pricing, operating expenses, policy impacts).

The model computes metrics like:

• Short-run marginal cost (SRMC) and long-run marginal cost (LRMC)
• EBITDA and cashflow trajectories
• Retirement year based on uneconomic operation (the “economic end-of-life”)

Carbon Tracker notes that using transition finance to expedite retirement of coal power can unlock system-level savings and reduce the climate cost of delay.

Action
Consider utility groups or sovereign coal-heavy systems where capital is scarce. Transition finance (structured differently than pure subsidies) can de-risk early retirement, making the economics viable earlier. Our model, PALEM, helps quantify how much concession – or how much subsidy – is justifiable given the avoided damage.

PALEM is directly in the spirit of translating climate risk into capital allocation decisions for real-world change. We engaged with a range of policymakers in Southeast Asia and local investors are looking at customising the model to prioritise coal phase out projects working with local governments.

Role for actuaries

• Help price blended finance tools like guarantees or concessional loans.
• Quantify the ROI of avoided climate damages.
• Assist in structuring debt and equity overlays or refinancing strategies for coal-heavy firms, with embedded climate-conditional triggers or step-down clauses.

In short: actuaries can help monetise the upside of rapid transition, not just price the downside of delay.

Role for investors

• Support transition finance vehicles to de-risk coal exits.
• Engage utilities and governments on prioritising early retirements.
• Channel capital into renewables where the economics are strongest.

Putting It Together: A Call to Actuarial Engagement

So where does that leave us, holding “Turning Insight into Action” as our North Star? There are four areas:

1. Actuaries must engage upstream – do not wait for regulators or NGOs to define climate risk. You can help shape disclosure, scenario design, capital buffers, and risk pools.
2. Translate disclosures into models – Convert insights into premiums, reserves, stress tests, hedges.
3. Bridge the domains – between climate science, economics, and financial policy. The loaded-dice approach, viability tests, and transition finance frameworks all require actuaries to be translators and integrators.
4. Embed change in governance – ensure boards, underwriting committees, audit functions, and capital allocators incorporate climate risk not as a side constraint but as a core axis of decision.

If we do this, we transform climate insight from academic or theoretical exercises into embedded risk management and value creation practice – with risk mitigated, priced, governed, and capital appropriately allocated.

Conclusion

Let me close with a metaphor.

The body of work and insights we shared today is a map of the terrain – showing cliffs, trapdoors, and possible routes. But maps don’t move us. What actuaries do is act as navigators: turn these maps into routes, risk management, and guided decisions for investors.

Turning insight into action is your domain, and the climate challenge is one of the largest and most urgent territories you will chart in your careers.