Our approach to climate change
Our role in managing risks to the financial system
As kaitiaki of the financial system, our role is to guard the prudential soundness of our regulated entities and the system as a whole.
Climate change poses a direct challenge to financial stability. Climate financial risks includes physical risks (for example droughts or increased flooding) and transitional risks (for example, carbon pricing or legal challenges).
Our main concern is the exposure of the financial sector such as banks and insurers to climate-related risks. Global understanding of climate risks is evolving along with the understanding of how they impact financial stability. Markets move quickly once a critical mass of information is available.
Our activities in the climate space, both in our role as kaitiaki of the financial system and in collaboration with others, can enhance transparency and reduce market failures such as information asymmetry.
Our climate change strategy
Released in 2018, our climate strategy has 3 avenues:
- Monitoring and managing our impact on climate
- Understanding and incorporating the impact of climate change on our core functions
- Providing leadership as an institution.
Financial entities having to disclose their climate risks will help all 3 avenues. Disclosure will enable risk assessment and mitigation, and motivate investment in emissions reduction and adaptation. It will change businesses' behaviour by directing attention to climate-related risks – ‘you manage what you measure’. Investors’ behaviour will also change as they see both climate risks and opportunities.
- Read our climate change strategy (December 2018)
Implementing our climate strategy
Our climate strategy is implemented by staff from across the Reserve Bank. While we have made good progress, we are at the early stages of our journey. Our Statement of Intent 2020/2021 highlighted three focus areas:
- Raising external awareness
- Contributing to regulatory policy discussion such as climate-related disclosures
- Building our own capacity and awareness
Our 2021/2022 focus includes integrating climate change considerations more deeply across the Reserve Bank. For example, we are intensifying our supervision of climate-related risks and working to increase our understanding of climate-related risks to financial stability.
New Zealand collaboration
We collaborate with other financial regulators on climate change and we lead the Council of Financial Regulators’ (CoFR) Climate Change Community of Practice.
To improve our evolving understanding of climate risks, we engage widely with scientists and researchers, including universities, Niwa, the Deep South National Science Challenge and the Whakahura Extreme Events and the Emergence of Climate Change programme which is funded by the Ministry of Business, Innovation and Employment.
We also engage with industry on climate change via groups such as the N ew Zealand Bankers’ Association, Institute of Directors, the Sustainable Finance Forum and the Banking and Financial Services Law Association.
Our submission to the Climate Change Commission Draft Advice
Our response to the Climate Change Commission’s Climate Action for Aotearoa consultation focuses on understanding and addressing the exposure of the financial sector to climate-related risks.
This is the Commission’s first draft advice report to the Government on the steps New Zealand can take to reduce greenhouse gas emissions and address climate change.
We have commented on 5 key areas that are of particular relevance to our remit.
Playing a part globally, and as a leader in the Pacific region, is important both in terms of reinforcing New Zealand’s reputation as a ‘good global citizen’, and in providing us access to the latest thinking around the globe.
We are a member of the Central Banks and Supervisors for Greening the Financial System (NGFS)
We are a member of the Sustainable Insurance Forum.
- Matangirua ki Matangireia - Working as one, towards our ultimate purpose – Our Governor speaking to the Mindful Money Awards 29 June 2021
- A near horizon: Seizing the opportunities and managing the risks in the transition to net zero: The importance of climate-related financial disclosures – Our Governor Adrian Orr speaking at a virtual roundtable attended by Mark Carney (United Nations Special Envoy for Climate Action and Finance) on 28 May 2020
- Progressing climate action by driving transformation change – A speech delivered by Governor Adrian Orr to the 2020 Pacific Ocean, Pacific Climate Change Conference, 28 October 2020
Financial Stability Reports
Our bi-annual Financial Stability Reports are starting to include the impacts of climate change on financial stability, for example:
- The Reserve Bank is placing a greater focus on how insurers respond to climate change risks (PDF 1.9MB) (from May 2021 Financial Stability Report)
- Disclosure and supervision of climate-related risks (from November 2020 Financial Stability Report)
- The impact of climate change on New Zealand's financial system (from November 2018 Financial Stability Report)
Like many central banks we have a strong interest in climate change as understanding, quantifying and managing significant risks is our core business. However, climate risks are difficult to identify, price, allocate and manage accurately. This is partly because historic data is of limited use for assessing future risks and is also why developing scenarios to project future risks is so important.
The 2021 stress test programme begins our stress test journey of climate change, with the inclusion of drought conditions in the bank stress test scenario and the severe weather events in the insurance stress test.
We also contribute at the international level to help the Network for Greening the Financial System to develop scenarios to project climate change risks. The first scenario to include country-specific data for New Zealand was published in June 2021.
Now these scenarios have been published, we are beginning a project to summarise the latest insights on the main financial stability risks, looking across the growing pool of research being done in New Zealand and around the world. We will look at both transitional and physical impacts, and plan to incorporate some results from the NGFS climate change scenarios.
Our analysis will consider who is exposed to the costs, and how banks and insurers will be affected. One output from this will be identifying what has been done already and any data gaps.
Following this project, we intend to do more in-depth analysis of the key risks. For example, impacts of sea-level rise on housing and mortgage lending or the impacts on the agricultural sector.
Climate Change: Overview of potential implications for financial system soundness
This 2018 paper included preliminary analysis on the impacts of climate change and highlighted areas of exposure such as agricultural lending and exposure to sea-level rise.
- Read Climate Change: Overview of potential implications for financial system soundness and efficiency (PDF 1.1MB)
It highlighted the importance of understanding, disclosing and managing climate risks, concluding that: climate change “need not be a significant threat” provided “all risks are proactively understood, communicated and appropriately factored into decision making from the outset”.
However, our 2019 survey of New Zealand insurers and banks found broad concern that climate change exposed the financial system to significant risks but there was little evidence that these concerns were influencing daily business decisions. The lack of action may be due to the partial awareness of climate-change risk. Only 60% of surveyed banks and one-third of insurers disclosed some climate-related information. We have since stepped up our supervision of climate-related risks and supported the Government’s plans to introduce mandatory reporting of climate related risks.