Industry survey on the potential impacts of climate change
This page contains information on the impact of climate change on New Zealand's financial system from the May 2019 Financial Stability Report.
Climate change is widely expected to impact the financial system…
The previous Financial Stability Report outlined the potential impact of climate change on New Zealand’s financial system. As part of its climate change strategy, the Reserve Bank is engaging with insurers and banks in New Zealand and with international agencies. In 2018, the Reserve Bank joined the Central Banks and Supervisors Network for Greening the Financial System and the Sustainable Insurance Forum.
The Reserve Bank recently surveyed a sample of New Zealand insurers and banks, as part of a global survey on the implementation of disclosure recommendations developed by the Task Force on Climate-related Financial Disclosures (TCFD). The survey highlighted broad consensus that climate change will impact the financial system (figure B1). All banks and 90 percent of non-life insurers thought climate change is a risk to their businesses. Around 60 percent of life insurers recognised climate change as a risk to their businesses, reflecting their less direct exposure to climate change risks.
Figure B1: Respondents who believe climate change will impact their businesses 9% of surveyed institutions)
Respondents were asked to identify areas where they thought their businesses could be affected. There was a clear expectation that climate change will have a business-wide impact on the banking system, with the majority of responses identifying likely impacts on all their material business lines (figure B2).
Figure B2: Expected impact of climate change on banks (% of surveyed banks)
Non-life insurers identified a broad range of potential impacts, with particular emphasis on the potential for increasing liability claims (figure B3). Life insurers were less concerned around increasing claims, but many expected impacts on their investments.
Figure B3: Expected impact of climate change on insurers 9% of surveyed insurers that recognised climate change as a risk
Note: Insurers that provide life and non-life insurance products are included in the figures for both sectors.
…but climate risks must still be better integrated within business practices.
Given the widespread acknowledgement that the financial system is exposed to climate change risks, boards of financial institutions should work to understand the potential impacts on their businesses. The survey responses provided little evidence that concerns about climate change risks are influencing day-to-day business decisions. Management and boards must consider all material risks when setting the strategic directions of their businesses. The Reserve Bank will continue to engage with banks and insurers on this issue.
New Zealand currently enjoys good access to general insurance products, but that could change as banks and insurers progressively factor climate change risks into their business decisions (see the insurance section). The availability and pricing of financial products could alter significantly for some communities and individuals. As banks and insurers respond to climate change risks, some risks may ultimately end up with other parties, such as central and local government. It is important that these potential market dynamics are understood and managed appropriately.
Enhanced disclosure will facilitate better risk management.
The disclosure of institutions’ exposure to climate change risks is important for there to be a coordinated response to the risks. 60 percent of surveyed banks and around a third of surveyed insurers already disclose some information on climate risk. A number of banks and insurers operating within New Zealand are part of wider groups that are actively supporting the implementation of international standards for disclosure of climate risks, developed by the TCFD. But not all disclosures are aligned with those international standards.
There are some barriers to the broader implementation of the TCFD disclosure standards in New Zealand, including the availability of data, capacity and resources. The Reserve Bank places significant emphasis on disclosure as part of its regulatory framework, and is committed to working with industry and wider stakeholders to develop an appropriate climate risk disclosure framework for New Zealand.