Sustainable Finance: The earlier we act, the greater the opportunities
Op-ed from Reserve Bank Governor Adrian Orr
2020 is a year none of us will forget. In the face of the COVID-19 pandemic, humanity has had to face mortality and work together to control a disease that relies on social interaction to spread.
This need for cohesion draws eerie parallels to our continued global struggles with controlling our impact on the environment. Early warnings; conflicting messages; politicisation of the science - the writing has also been on the wall but climate change is a slower moving beast. As The Economist put it, COVID-19 is climate change on fast-forward.1
As New Zealand’s Reserve Bank, we at Te Pūtea Matua are spending an increasing amount of time considering how external environmental challenges will impact New Zealand, specifically with regard to the stability of our financial system.
We act collectively to promote the economic prosperity and well-being of all New Zealanders and like many other central banks and regulators, we see climate change as a key risk to the financial stability underpinning the economy. Risks such as droughts and rising sea levels have a direct impact on asset valuations such as farms and houses, while the shift to a lower-emission economy means changes in investor and consumer demand. Foremost, our interest is the exposure of the financial sector such as banks and insurers to these risks. And whether these risks have been identified, priced, allocated, and managed effectively.
Our thinking on the interface of environmental sustainability and financial systems has evolved over the past few years. We have adopted a climate strategy2 focused on three key components: incorporating climate change into our core functions; managing our direct impact on the climate; and leading through experience and collaboration. After we first launched our climate strategy at the end of 2018 we were often asked why the central bank was placing such an emphasis on climate change. Now we are being asked if we can go faster.
However, we can’t do this on our own. Addressing the risks of climate change requires the involvement of everyone, including other public sector agencies, private firms and NGOs. Preserving our environment is an existential crisis, and it can be difficult to find the time to take a systemic, strategic view of the issues at hand. That’s why it’s important that groups such as Aotearoa Circle’s Sustainable Finance Forum brings people in the financial system together to put these issues squarely on the table for the public and private sector and the communities we serve. We have seen the benefit of working together with our regulatory partners and the financial sector to respond to the impact of the COVID-19 pandemic, and we need to continue this cooperation to have a meaningful impact against climate change.
We welcome the publication of the Sustainable Finance Forum report and commend the vision. I urge those from across the private and public sectors, communities and iwi, and our broader stakeholders to reflect on and engage with this report. Views will be diverse on what matters most, but the discourse is engagement.
Ultimately, it will be actions, not words that will lower emissions and prepare our economy and communities for floods, droughts and increased disruptions. And this is where we collectively need to step up. We all need to explore together how we can facilitate the significant investment needed in climate response both in adaptation and transition. Those conversations take courage but need to continue with an end goal of establishing enduring and sustainable funding directed at these two interlinked and urgent economic challenges: COVID-19 recovery and climate response.
Of course sustainability is about more than climate change. I am proud that our climate strategy sits alongside our Te Ao Māori strategy3 and challenges us to continue to build our understanding of Te Ao Māori and the Māori economy for the long-term wellbeing of all of Aotearoa and our wider Pacific strategy. These strategies support and reinforce each other. They share an emphasis on collaboration, leadership, and kaitiakitanga. Indeed, the root of the Māori word for leadership - ‘Rangatira’ is ‘raranga’, and ‘tira’ – the weaving together of different people and perspectives.
Globally, we must recognise this and take advantage of collaboration across the financial sector to tackle climate change. As economic activity shifts away from travel and other fossil fuel-intensive sectors, and towards green tech, sustainable energy and smarter ways of doing business, there is an opportunity for green-focused investments to support this shift. The earlier we act, the greater the opportunities. Here in Aotearoa we have a choice – sink, or swim.