Getting the settings in place
Find out how we are mainstreaming climate-related risk into our core functions.
Understanding and incorporating the impact of climate-related risk is critical to us in carrying out many of our core functions:
- acting as a prudential regulator and supervisor under prudential legislation
- formulating and implementing monetary policy, and
- other functions as set out in the Reserve Bank of New Zealand Act 2021.
Analyse the impact on financial stability
Undertake a more in-depth analysis of the potential implications of climate-related risk for financial stability.
Monitor capital markets
Monitor the development and operation of capital markets to identify any impediments to the efficient provision of finance for ‘green’ investments.
Analyse the impact on inflation and labour market outcomes
Consider the impact of climate-related risks on inflation and labour market outcomes as per our monetary policy mandate.
Engage with regulated entities
Engage with regulated entities to understand how climate-related risks are being addressed within the sectors that we regulate.
Analyse the impact on future capital and migration flows
Analyse the potential impact of climate change on future capital and migration flows, and the implications for the New Zealand economy and financial system.
National Adaptation Plan
In August 2022, the government published the National Adaptation Plan (NAP) which contains Government-led strategies, policies, and proposals that will help New Zealanders adapt to the changing climate.
Chapter 10 of the NAP is focused on the economy and financial system, with action 10.4 setting out on how the Reserve Bank will support the stability of the financial system from 2022 to 2024.
This action was developed in consultation with us and committed us to prioritising work in the following three categories directly relevant to adaptation outcomes in New Zealand:
- climate-related stress testing
- integrating climate-related risk into supervisory engagements with regulated entities
- developing climate-related risk management guidance or the entities we regulate.
What we are doing
Acting as a prudential regulator and supervisor under prudential legislation
Assessing prudentially regulated entities’ (entities’) material risks, and the financial system as an ecosystem, is at the core of meeting our financial stability objective.
Financial stability means having a resilient financial system that can withstand severe but plausible shocks and provide the financial services that we all rely on. This ensures everyone in New Zealand can safely save their money, make everyday transactions, access credit to consume and invest and insure against risks.
To meet our financial stability objective, we need to take account of the current and future impacts of climate change. We also need to account for responses to climate change in the form of changing policies, regulations, costs and consumer preferences.
Since we published our climate strategy in 2018, we have focused our attention on incorporating climate-related risks into our role as a prudential regulator and supervisor in 3 main areas:
- incorporating climate-related risks into our prudential capital framework
- embedding climate-related risks into our supervisory approach, and
- developing guidance for prudentially regulated entities on managing climate-related risks.
Incorporating climate change into our prudential capital framework
Stress testing is a tool used to assess the resilience of financial entities to severe but plausible shocks. Traditionally, we have used this to explore financial stability risks during economic downturns. We are expanding this to include climate change as it helps us and the wider industry to build capabilities to assess and understand the impact of climate change on the financial system.
- In 2021, we introduced a climate-related risk element into our annual solvency stress test by including a 2-year North Island drought in the scenario. We also conducted our first insurance stress test which included a scenario with more severe and frequent weather events.
- In 2022, we undertook a series of sensitivities examining climate-related risks posed to large banks’ systemically important loan exposures, residential mortgages and agriculture.
- In 2023 we completed our first full climate stress test with large banks and have published a bulletin with the key findings and recommendations.
Our prudential framework requires banks to risk weight their credit exposures as part of meeting capital requirements. These settings help to ensure banks are resilient in the face of shocks, to support financial stability. In March 2024, we published a Bulletin article discussing the use of credit risk weights for climate-related purposes.
Read the Bulletin (PDF, 324 KB)
Embedding climate change into our supervisory approach
Supervision is a key aspect of delivering on our climate strategy. Supervisors act as a conduit between regulated entities and us. This provides a way of assessing, monitoring and supporting entities’ ability to meet our financial stability objectives.
We have conducted 2 industry surveys to understand the extent to which the sample of deposit takers and insurers are managing climate-related risks.
Read the 2019 industry survey results in our May 2019 Financial Stability Report
Read our 2023 Bulletin - Industry survey on climate-related risk management and disclosure
We continue to hold an increasing number of conversations with entities, including discussing the responsibilities, oversight, and implementation of their climate-related strategies and risk management. Many of these are in collaboration with the Financial Markets Authority (FMA), who is responsible for monitoring and enforcing the climate-related disclosures regime.
We continue to expand our training for supervisors and integrate climate-related risks into our supervisory frameworks.
In March 2024, we published Guidance following a consultation on a draft version that we issued in March 2023. As risk management practices, climate-related risks and legislation are ever-evolving, we will continue to update the Guidance from time to time.
Formulating and implementing monetary policy
Climate change poses several risks to economic growth, inflation, and the financial system. For example, physical risk could lead to greater volatility in goods inflation as food, energy, and transport costs are affected by extreme weather events domestically and internationally. The transition to a greener economy could also lead to higher-emission industries facing higher costs.
While the macroeconomic consequences of climate change have impacts on monetary policy, it is less clear that monetary policy can influence climate change or its economic impacts.
Monetary Policy Committee Remit Review consultation
In June 2022 we held the first round of public consultation on the 5-year review of the Remit that guides monetary policy decisions.
We asked the public for feedback on the relevance of climate change for monetary policy.
A majority of respondents believed climate change should not be included in the Remit. However, many acknowledged that monetary policy still needs to understand how climate-related risks will affect our economic objective of maintaining price stability.
Find out more about the Monetary Policy Committee Remit Review consultation
Our work to understand and address the impacts of climate change on monetary policy is ongoing.
This includes:
- engaging in more systematic monitoring
- reviewing literature
- expanding our modelling capability and capacity
- exploring options for incorporating climate-related risk analysis into our balance sheet risk management.
