Today at the Chapter Zero Breakfast, Governor of the Reserve Bank of New Zealand (RBNZ) Adrian Orr gave a speech on how the RBNZ is working with its stakeholders to respond to climate change.
Who needs to read it? Why?
This speech indicates the importance the RBNZ attaches to the challenges posed by climate change, both for itself and for the entities it supervises.
It highlights the necessity of all central banks to fully understand the increasing impacts of climate change on a nation’s economy, and what can be done to mitigate and adapt to those impacts. Mr Orr’s statements give readers a clear outline of what can be expected from the RBNZ in this respect.
The RBNZ’s approach
Mr Orr noted that the role of the RBNZ includes:
- managing inflation to keep prices stable while supporting maximum sustainable employment;
- protecting and promoting stability within New Zealand’s financial system;
- producing New Zealand’s banknotes and coins; and
- operating effective wholesale payment and settlement systems.
The RBNZ considers that climate change intersects with all of these mandated roles. Mr Orr recognised that “an efficient system better recognises, prices, allocates, and manages economic risk as information becomes available to do so. Climate change is one such risk.” In taking this approach, the RBNZ has aligned itself with many central banks in preparing for climate change, which is done through policy settings as well as prudential supervision and oversight of its financial institutions.
Mr Orr called out the following work that the RBNZ does with prudentially regulated entities:
- including climate-related risks in stress testing to help banking and insurance sectors build capability in assessing the impact of climate on financial stability;
- providing guidance on managing climate-related risk; and
- making climate-related risk a priority theme at the Council for Financial Regulators.
Mr Orr also detailed the actions that the RBNZ is taking to make its own climate related disclosure (CRD) in line with the new CRD regime in Part 7A of the FMCA, though this is not mandatory for the institution. He stated that “we fully understand that effective disclosure processes involve more than adding emissions data to an Annual Report or a declaration”, and that “developing a meaningful disclosure requires an in-depth interrogation of how your organisation’s strategy and core functions are affected by climate-related risks.”
This requires paying attention to how disruptive supply-side shocks can occur from worsening climate impacts and an economy in transition, as well as considering the potential impacts on employment and inflation in New Zealand. In relation to the physical risks, the RBNZ is looking at the evidence of the macroeconomic significance of drought, and have found that this is an exacerbating factor during recessions. Mr Orr also acknowledged that though drought has historically been the greatest climate-related exposure our economy faces, climate change also means an increase in the severity and frequency of events such as storms and floods. We saw evidence of this last summer.
Mr Orr further stated that the RBNZ has been identifying and addressing the climate-related risks and opportunities in its balance sheets – in particular assessing sovereign bonds for their past and potential future exposure to climate-related risk. There was also recognition that work needs to be done to ensure that central bank money is still available to the public when there a crisis situations like Cyclone Gabrielle, where it was demonstrated how vital it is that people have reliable access to cash and payment systems. It was on this topic that Mr Orr stated that adaption could include a new digital New Zealand dollar that could circulate alongside physical cash.
We look forward to seeing the solutions the RBNZ develops in guiding New Zealand through a world increasingly impacted by climate change, and are encouraged by the attention that is clearly being paid to this issue within the institution.
It is encouraging to see the RBNZ recognises the challenges that need to be addressed include both adaption and mitigation, with the banking and insurance sectors exposed to physical and transition impacts. This will particularly be the case if we continue on the current “too little, too late” path (see the New Zealand Banking Association’s Climate scenario narratives analysis). It is also good to see the RBNZ attempting to lead by example, by committing to issue voluntarily CRD on the same basis that the large banks and insurers are required to disclose.
On a refreshingly positive note, Mr Orr’s speech included the observation that with disruption, which climate change will surely bring, comes opportunity. We agree with his sentiment that the development of low-emissions technologies, the decoupling of economic activity from material through-put, and developing novel adaption-related goods/ services provides New Zealand with a transition pathway to a low-emissions, climate-resilient future.
If you have any questions in relation to assessing the impact that climate change may have on your business, or the climate-related disclosures regime, please contact one of our experts.
This article was co-authored by Elise Plunket, a Solicitor in our Banking and Financial Services team.
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