Thank you for joining the CAFII webinar with Deloitte. The ...€¦ · significant losses, damages,...
Transcript of Thank you for joining the CAFII webinar with Deloitte. The ...€¦ · significant losses, damages,...
Session agenda Time Today’s Speakers
1 Introduction 1 min
2 Climate change and life insurance 24 min
3 Modelling hypotheses case study 10 min
4 Risk mitigation case study 5 min
5 COVID-19 and climate change 5 min
Questions 15 min
Thank you for joining the CAFII webinar with Deloitte. The session will start momentarily.
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Carolyn MurnaghanSenior Manager, Deloitte• Specialist in risk modelling and governance• FSI specialist in insurance and reinsurance,
banking and capital markets
Harry LiManager, Deloitte• Expertise in actuarial capital management,
actuarial audit and external peer review• Life insurance specialist and member of the
CIA Climate Change subcommittee
Joe SollyPartner, Deloitte • Eastern Canada leader of Sustainability &
Climate Change• Leads climate disclosure practice
CAFII webinar: The Looming Impact of Climate Change Upon the Life and Health Insurance IndustryJune 9, 2020
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Introduction of speakers from Deloitte
Carolyn MurnaghanSenior Manager, Deloitte• Specialist in risk modelling and governance• FSI specialist in insurance and reinsurance, banking and capital [email protected]
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Joe SollyPartner, Deloitte • Eastern Canada leader of Sustainability & Climate Change• Leads climate disclosure [email protected]
Harry LiManager, Deloitte• Expertise in actuarial capital management, actuarial audit and external peer review• Life insurance specialist and member of the CIA Climate Change [email protected]
Climate change, life and health
Joe SollyDeloitte Partner, Sustainability & Climate Change
Carolyn MurnaghanSenior Manager, Risk Advisory, Deloitte
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An evolution to “green / environmental”
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Top 5 Global Risks in Terms of Likelihood
Top 5 Global Risks in Terms of Impact
Extreme weather
Climate action failure
Natural disasters
Biodiversity loss
Human-made environmental disaster
Climate action failure
Weapons of mass destruction
Biodiversity loss
Extreme weather
Water crises
In the 2020 Global Risks Report from the World Economic Forum (WEF), all five of the top risks by likelihood, and three by impact are climate-related
2020
The WEF Global Risks Landscape
Climate action failure
Extreme weather
Likelihood
Impa
ct
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Infectious diseases
The Global Risks Interconnections Map shows climate action failure to be closely intertwined with other major risks, such as food crises and critical infrastructure failure
Climate change poses risks for the stability of the financial system as well as consumers of financial products and services such as insurance
Climate-related risks to consider
First-order risks arising from weather-related events, such as wildfires, extreme heat and cold, floods and coastal storms
Transition risks
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Liability risksPhysical risks
Financial risks arising from the movement to a lower carbon producing economy, including
the re-pricing of carbon-intensive assets
Risks that could arise for corporations or insurance firms from parties who have suffered loss and damage from climate change, and seek to recover
such losses from others
• Physical infrastructure• Coastal communities• Northern communities• Human health and wellness• Ecosystems• Fisheries• Agriculture and food• Forestry• Geopolitical dynamics• Governance and Capacity• Indigenous ways of life• Water
Top climate change risks facing Canada
Source (adapted from)Canada’s Top Climate Change Risks: The Expert Panel on Climate Change Risks and Adaptation Potential (2019)
, as well as periods of higher freshwater levels
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12 major areas of climate change risk facing Canada
Top six areas of climate change risk which could involve significant losses, damages, or disruptions in Canada over the next 20 years.
Canada is warming at twice the global rate according to Canada’s Changing Climate Report released in 2019
Climate change is increasingly top of mind for Bank of CanadaIdentified climate change as 1 of 6 vulnerabilities for its impact on Canada’s financial stability for the first time
November ’19 | Bank of Canada outlines its research priorities on the potential impacts of climate change, and indicates it is developing new models to understand climate change impacts on financial stability
March ’19 | Bank of Canada joins the Central Banks’ and Supervisors’ Network for Greening the Financial System (NGFS)
April ’19 | NGFS releases a report called “A call for action: Climate change as a source of financial risk” which identifies scenario analysis and stress testing as tools for integrating climate-related factors into prudential supervision
May ’19 | Bank of Canada lists climate change among the top worries for the economy in the 2019 Financial System Review
June ’19 | Expert Panel on Sustainable Finance releases final report that supports the development of a green taxonomy and use of climate stress tests in Canada
2019
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2020
May ’20 | Tiff Macklem is appointed Governor of Bank of CanadaFederal government makes annual climate-related disclosure mandatory for COVID-19 emergency financing
Addressed climate change in: OSFI Annual Report 2018-2019OSFI
• Climate change risk has become an area of increased focus and can have significant impacts on financial institutions and private pension plans.
• OSFI supports the view that institutions should adopt a strategic approach to addressing climate change risk.
• OSFI will be evaluating the progress made by financial institutions in identifying, monitoring, assessing and responding to climate change risk.
• OSFI will be enhancing its knowledge and understanding of the risks, developing supervisory capabilities and assessing the impacts on supervisory practices and guidance.
• OSFI will continue to monitor global developments such as climate change risk, and determine appropriate responses that support overall financial stability.
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UK’s PRA has announced that it will delay the launch of its
climate biennial exploratory scenario as it cancelled the
annual stress tests for financial institutions
Bank of England postponed climate
stress testing
Impact from COVID-19
Climate stress tests for financial institutions are comingFinancial regulators are increasingly emphasizing the importance of identification, management and disclosure of climate-related risks
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Following the NGFS and French Prudential Supervision and Resolution Authority (ACPR) reports, the Bank of France has announced the arrival of climate change stress tests for French banks and insurers in which they will be subjected to two or three adverse climate scenarios
UK’s Prudential Regulation Authority (PRA) said the 2019 insurance stress test was designed to “capture information about how different firms are exposed to difficult-to-assess risks” such as climate change. Firms must consider the impact of three greenhouse emissions scenarios on their liabilities and assets valuations
The European Central Bank is asking banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy in its new guide published for consultation in May 2020
The Australian Prudential Regulatory Authority (APRA) is also in the process of developing climate stress tests that require banks to run risk assessments for their loan books and business models under various climate scenarios
Monetary Authority of Singapore (MAS) is working on incorporating a broader range of climate change-related risks in stress testing scenarios
In its Feb 2020 staff paper, “Stress Testing at the IMF,” International Monetary Fund (IMF) emphasizes stress testing as an important tool for assessing institutions’ resilience to future financial crises
Climate-related challenges and opportunities faced by insurers
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Challenges Opportunities
Liabilities side• Limited access to risk information and related risk pricing
difficulties • Public policy, regulatory and legislative issues around
insurability• Lack of awareness about the role of insurance in mitigating
climate-related life and health risks
• Disconnect between climate impact research and modelling and life and health insurance financial models
Assets side• Need for well-defined asset classifications, standards and
methodologies for assessing green investments
• Fragmentation in climate policies and regulations across Canada and globally that impact investors’ confidence
• Lack of appropriate price signals (e.g., carbon price)
• Need for green investment opportunities and structures that better satisfy the insurance industry’s risk appetite
• Availability of data and transparency for informed investing
Liabilities side• Need for stakeholder-relevant products and services
• Better underwriting, pricing, and investment decisionsenabled by climate risk integration
Assets side• Growing capacity of the markets to accommodate large-
scale portfolio allocations to green
• Regulatory emphasis on climate resilience and decarbonisation of the economy
• Demonstration of support for the development of and transition to a sustainable, just and healthy future
Climate change can exacerbate health problems that already exist through negative impacts on environmental conditions, social infrastructure and public health systems
Pathways by which climate change affects health
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Source: Fifth Assessment Report of the Intergovernmental Panel on Climate Change (2014)
The health effects of climate change on a global scale are substantial
Global perspective
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712 extreme weather events occurred around the world in 2017, resulting in $326 billion (USD) in economic losses; nearly a three-fold increase in economic losses over 2015
157 million more people were exposed to heat waves in 2017 than were exposed in 2000; 3.4 billion weeks of work were lost due to extreme heat
There has been an increase in insect- and water-borne diseases in certain regions of the world
There was a decrease in agricultural yield potential in the 30 countries for which data were available; undernutrition is considered one of the largest health effects of climate change in the 21st century
Examples of health effects of climate changeThe Intergovernmental Panel on Climate Change (IPCC) has identified the effects on health resulting from climate change as:
Increases in atmospheric temperature
Reduced air quality from GHGs
Extreme weather events and changes to weather
Expanded the geographic range of insects and other species due to warming temperatures
• Rise in morbidity and mortality due to heat-related illnesses such as heat stroke, heat edema, heat rash, heat stress, acute cardiovascular disease and renal disease
• Rise in morbidity and mortality due to asthma, ischemic heart disease, stroke, acute lower respiratory infections, lung cancer and chronic obstructive pulmonary disease
• Threats to food security, housing and infrastructure and result in lost income for those affected by the event
• Increasing in prevalence of vector-borne diseases
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Australia wildfire case studyImpacts on the life insurance industry such as respiratory disorders and mental illness
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However, indirect impacts of bushfires can have significant implications on life and health.
Media and research have focused on impacts of natural disasters on communities, and direct loss of life and property
Loss of life from bushfires, for example, is not significant compared to the rest of life insurers’ risk pools – an average of five deaths in
Australia per year1
1 https://www.christiantoday.co.nz/news/bushfires-across-the-nation.html2 https://pubmed.ncbi.nlm.nih.gov/9257516/
Ambient air pollution is a major cause of death and disease globally, with the World Health Organization ranking it the 5th risk factor in mortality and 6th in DALYs (disability-adjusted life years) in 2015. Increase in days of high forest fire risks can be used as a proxy as an increase in air polluted days.
Examples of indirect impacts of bushfires on life and health
Studies find that individuals affected by bushfires, or any natural or man-made disaster, are at risk of long-term mental illness, including anxiety, depression, substance abuse and Post-Traumatic Stress Disorder (PTSD), and often suffering two or more mental comorbidities.2
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Insurers have opportunities to improve long-term climate risk preparedness
Raise the profile of climate risk in the organization
Improve assessment of climate risk using advanced analytics
Take an enterprise-wide view while managing climate risks and providing meaningful disclosures
Work with insureds to alleviate climate risk exposure
1
2
3
4
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1. Raise the profile of climate risk in the organization
Action steps for insurers to consider
Establish a clear governance structure, including the creation of dedicated roles to evaluate the impacts of climate-related risks
Embed ongoing climate risk assessment and mitigation efforts across all functions in the company
Make climate risk top of mind for everyone in the organization so that its assessment becomes pervasive during decision-making on products, underwriting, and distribution
An engaged board working closely with senior management on climate issues can sharpen focus across the organization on the risks involved while
assuring adequate resources are allocated to accurately assess and mitigate them
Across industries
2017 Ceresreport
Insurance industry
2017 Ceresreport
Responsibility of sustainability performance assigned to senior executives
65%38%
Insurance industry
2014 Ceresreport
17%
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2. Improve assessment of climate risk using advanced analytics
Action steps for insurers to consider
Increase external outreach and internal research tobetter understand limitations of current catastrophemodel assumptions
Utilize advanced analytics and visualization tools and augment models with big data to improve risk selection and pricing
Consider partnering with focused InsurTechs to better assess impacts at asset and portfolio level
Current catastrophe models that rely heavilyupon historical loss data may be less useful for future loss projections, given the inherent
uncertainty of a changing climate
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3. Take an enterprise-wide view while managing climate risks and providinggreater disclosures
Action steps for insurers to consider
Develop and provide more detailed disclosures oforganization-wide risks to various stakeholders
Embed climate risk assessment in the enterprise risk management framework to get a holistic view of actual and potential climate change impact
Conduct organization-wide stress tests of a broad range of plausible climate change scenarios to determine capital and liquidity implications
Enterprise risk management framework
and processes could speed upexposure assessment and
identify mitigation opportunities
Climate risks couldaffect multiple lines of business,
investment performance, and long-term profitability
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4. Work with insureds to alleviate climate risk exposure
Action steps for insurers to consider
Leverage and support industry-wide efforts toeducate insureds on ways to protect properties against severe weather (e.g. heat, cold, storms, etc.)
Incentivize insureds who invest in mitigating climate-related risks through adaptation measures(noting this is less impactful for life insurers)
Regulators are beginning to suggest that insurers work with their insured on preparedness in the longer term through:
• Educating clients on climate-related risks• Encouraging insureds to adopt risk mitigation
strategies
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Modelling hypotheses case study
Harry LiManager, Audit & Assurance, Deloitte
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Modelling hypotheses
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• Water scarcity in vulnerable populations• Knock-on impact of excessive precipitation
Temperature
Precipitation
Secondary effects
Developed Countries
• Mass migration/human conflict• Insects and other disease vectors
• More deaths were caused by extreme cold than by heat • Extreme temperature anomaly vs. gradual temperature increase
• Insured vs. uninsured populations• Gross Domestic Product and healthcare investments
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Reference climate scenario identification is a key step of the approach, it has to be granular, reliable and complex enough to integrate different kinds of parameters and their impacts
Overview of reference climate scenarios
Climate scenario analysis is an effective tool to help in strategic choices when dealing with uncertainty.
It is essential to determine the level of ambition of the institution and to choose or create a relevant climate scenario.
Adequate climate scenarios should have the following characteristics:
Existing reference climate
scenarios
International Energy Agency (IEA) Scenarios
Non-Governmental Organizations’ Scenarios
InterAcademy Council (IAC) Scenarios
Private sector scenarios (Shell, Exxon, ...)
Based on latest scientific
knowledge
Political, technological and economic viability
Transparent on external data &
hypotheses
Comparable with existing
approaches
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A scenario analysis approach helps show medium to long-term risks and opportunities objectively and understandably for insurers
Climate scenarios mechanism
0
1
2
3
4
5
6
Climate Scenario Projections on Global Temperature Increase
(°C)
Qualitative Storyline Assumptions
Historical Data of Selected Parameters
Inputs needed for climate scenarios
Quantification by integrated assessment modeling
Climate Scenario OutputsTailored Scenario Narrative & Pathways
Social, technological, economic, environmental, and policy factors
Trend analyses of historical data taken by reliable data sources
Energy & Economy
Model 4Model
3
Climate
Model 1
Pollution
Model 2
Model 5
Disease
Taking the Highway SSP5
4.7 - 5.1°C
DividedRoad SSP4
3.5 - 3.8°C
Rocky Road SSP3
3.9 - 4.6°C
Middle of the Road SSP23.8 - 4.2°C
Taking the Green roadSSP13 – 3.5°C
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*SSP stands for Shared Socioeconomic Pathways
Risk mitigation case study
Carolyn MurnaghanSenior Manager, Risk Advisory, Deloitte
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Climate change poses risks for the stability of the financial system as well as consumers of financial products and services such as insurance
Climate-related risks to consumers and insurers
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Impact Area Areas of Actuarial Work Examples
Changes to current mortality and morbidity and uncertainty around future trends
Product Design Reserving • Product Pricing • Capital Management • Reinsurance • Setting long term demographic
assumptions • Explicit allowances of climate change
considerations in mortality and morbidity models
Changes to insurance regulatory environment All • Risk governance • Risk reporting • Corporate level disclosures • Customer / distributor disclosures • Outsourcing arrangements • Capital Management
Overall uncertainty around timing, magnitude and response to climate change
Risk Management/ORSA Pricing Reserving
• Risk governance • Strategic planning • Scenario Analysis • Risk Appetite Frameworks • Capital Management
Source (adapted from): A Practical Guide to Climate Change for Life Actuaries (2019) Institute and Faculty of Actuaries UK
Climate change poses risks for the stability of the financial system as well as consumers of financial products and services such as insurance
Climate-related risks to consumers and insurers
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Impact Area Areas of Actuarial Work Examples
Changes to economic growth and performance in wider economies. Effects of these on the demand for insurance products and their pricing
Product Design Reserving Financial / Strategic Planning
• Product Pricing • Own Risk Solvency Assessment (ORSA)• Longer term financial projections
Changes to investment over or underperformance: whether due to direct climate impacts on specific assets, regulation or restrictions leading to ‘stranded assets’, longer term investment opportunities in capital intensive climate change mitigation or transitions
Investment advice Product Design Reserving Investment Strategy Investment governance
• Product Pricing • Environmental, Social and Governance
(ESG) investments/ Socially Responsible Investments (SRI)
• Setting long term economic assumptions
• Asset Liability Matching • Matching Adjustment • Strategic and tactical asset allocations • Mark to model asset valuation of long-
term illiquid investments such as mortgages
Source (adapted from): A Practical Guide to Climate Change for Life Actuaries (2019) Institute and Faculty of Actuaries UK
Physical risks and transition risks impact the availability and pricing of traditional risk mitigation assumed in scenario-based analyses, the main challenges are as follows:
Challenges for risk mitigation for consumers and insurers
Insurance availabilityFuture insurance availability may decline significantly for geographies and/or exposure/risk types
This may make insurance inaccessible to certain consumer groups
Re-insurance capacity and pricing
Future reinsurance capacity may decline significantly for geographies and/or exposure/risk types
This may reduce the ability of insurers to manage their risk, thereby increasing pricing and/or reducing availability
Insurance pricingFuture insurance pricing may increase significantly for geographies and/or exposure/risk types
This may price out certain consumer groups
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Covid-19 and Climate change
Joe SollyDeloitte Partner, Sustainability & Climate Change
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Lessons learned from COVID-19
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‘Flattening the curve’ as early as possible helps build adaptation capacity and it requires collective action to do so
Many of the root causes of climate change also increase the risk of pandemics
Climate still is, and will continue to be, top-of-mind for the Canadian government, as evidenced by the climate disclosure requirement for government aid eligibility and the recent appointment of Tiff Macklem to the Bank of Canada
Climate change impacts how we relate to other people, animals and nature, and that impacts our health and our risk for infections
Deforestation Loss of habitat
Large livestock farms Water quality impacts
Air pollution
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Both COVID-19 and climate change are deadly
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Green recovery from COVID-19 is essential to reduce and build resilience against systemic risks of climate change for life and health
1 As of June 8, 20202 World Health Organization (2018)
397,000+Recorded deaths from COVID-191
Estimated additional deaths between 2030 and 2050 due to climate change2
5,000,000
“Climate change is the No.1 threat to global health.”- World Health Organization
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Questions
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Thank you
Joe SollyPartnerSustainability & Climate ChangeM: +1 647 388 [email protected]
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Carolyn MurnaghanSenior ManagerFinancial ServicesM: +1 437 216 [email protected]
Harry LiManagerFinancial ServicesM: +1 647 326 [email protected]
Contact Information
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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
The information contained herein is not intended to substitute for competent professional advice.
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Appendix
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SSPs derive greenhouse gas emissions scenarios with different climate policies
Shared Socioeconomic Pathways (SSP) are scenarios of projected socioeconomic global changes up to 2100
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SSP 1Emissions peak between 2040 and 2060 – even in the absence of specific climate policies, declining to around 22 to 48 gigatonnes of CO2 (GtCO2) per year by 2100. This results in 3-3.5C of warming by 2100.
SSP 2Emissions continue to increase through the end of the century, reaching between 65GtCO2 and 85GtCO2, with resulting warming of 3.8-4.2C.
SSP 3Models show a wide range of possible baseline emissions, with most runs showing increases up to around 76-86GtCO2 by 2100, but one model1having emissions of 129GtCO2, the highest of any SSP. These differences relate to access to economically recoverable oil. Warming in 2100 in SSP3 is estimated at 3.9-4.6C.
SSP 4Despite its high inequality, emissions are relatively low in due to rapid technological progress on low-carbon energy sources. SSP4 emissions range from 34GtCO2 to 45GtCO2 by 2100, with warming of 3.5-3.8C.
SSP 5The high-growth energy-intensive SSP5 shows the most overall emissions of any SSP, ranging from 104GtCO2 to 126GtCO2 in 2100, resulting in warming of 4.7-5.1C.
Soc
io-e
con
omic
ch
alle
ng
esfo
r m
itig
atio
n
Socio-economic challengesfor adaptation
SSP 5(Mitigation challenges
dominate)Fossil-fueled development
Taking the highwaySSP 2
(Medium challenges to mitigation and adaptation)
Middle of the road
SSP 1(Low challenges)
SustainabilityTaking the Green Road
SSP 3(High challenges to
mitigation and adaptation)Regional rivalry
A Rocky Road
SSP 4(Adaptation challenges
dominate)InequalityA Road Divided
1 http://data.ene.iiasa.ac.at/message-globiom/
The SSPs are based on five narratives of socioeconomic trends that could shape future society
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Source: https://www.sciencedirect.com/science/article/pii/S0959378016300681
SSP 1 Sustainability – Taking the Green Road (Low challenges to mitigation and adaptation)The world shifts gradually, but pervasively, toward a more sustainable path, emphasizing more inclusive development that respects perceived environmental boundaries. Management of the global commons slowly improves, educational and health investments accelerate the demographic transition, and the emphasis on economic growth shifts toward a broader emphasis on human well-being. Driven by an increasing commitment to achieving development goals, inequality is reduced both across and within countries. Consumption is oriented toward low material growth and lower resource and energy intensity.
SSP 2 Middle of the Road (Medium challenges to mitigation and adaptation)The world follows a path in which social, economic, and technological trends do not shift markedly from historical patterns. Development and income growth proceeds unevenly, with some countries making relatively good progress while others fall short of expectations. Global and national institutions work toward but make slow progress in achieving sustainable development goals. Environmental systems experience degradation, although there are some improvements and overall the intensity of resource and energy use declines. Global population growth is moderate and levels off in the second half of the century. Income inequality persists or improves only slowly and challenges to reducing vulnerability to societal and environmental changes remain.
SSP 3 Regional Rivalry – A Rocky Road (High challenges to mitigation and adaptation)A resurgent nationalism, concerns about competitiveness and security, and regional conflicts push countries to increasingly focus on domestic or, at most, regional issues. Policies shift over time to become increasingly oriented toward national and regional security issues. Countries focus on achieving energy and food security goals within their own regions at the expense of broader-based development. Investments in education and technological development decline. Economic development is slow, consumption is material-intensive, and inequalities persist or worsen over time. Population growth is low in industrialized and high in developing countries. A low international priority for addressing environmental concerns leads to strong environmental degradation in some regions.
SSP 4 Inequality – A Road Divided (Low challenges to mitigation, high challenges to adaptation)Highly unequal investments in human capital, combined with increasing disparities in economic opportunity and political power, lead to increasing inequalities and stratification both across and within countries. Over time, a gap widens between an internationally-connected society that contributes to knowledge- and capital-intensive sectors of the global economy, and a fragmented collection of lower-income, poorly educated societies that work in a labor intensive, low-tech economy. Social cohesion degrades and conflict and unrest become increasingly common. Technology development is high in the high-tech economy and sectors. The globally connected energy sector diversifies, with investments in both carbon-intensive fuels like coal and unconventional oil, but also low-carbon energy sources. Environmental policies focus on local issues around middle and high income areas.
SSP 5 Fossil-fueled Development – Taking the Highway (High challenges to mitigation, low challenges to adaptation)This world places increasing faith in competitive markets, innovation and participatory societies to produce rapid technological progress and development of human capital as the path to sustainable development. Global markets are increasingly integrated. There are also strong investments in health, education, and institutions to enhance human and social capital. At the same time, the push for economic and social development is coupled with the exploitation of abundant fossil fuel resources and the adoption of resource and energy intensive lifestyles around the world. All these factors lead to rapid growth of the global economy, while global population peaks and declines in the 21st century. Local environmental problems like air pollution are successfully managed. There is faith in the ability to effectively manage social and ecological systems, including by geo-engineering if necessary.