A long-term view for generations

Assistant Governor Simone Robbers. Photo / Supplied

As caretakers, or kaitiaki, of the financial system, we at the Reserve Bank of New Zealand — Te Pūtea Matua — have a strong interest in, and influence on, the long-term economic wellbeing of New Zealanders, writes Assistant Governor Simone Robbers.

All banks and 90 per cent of non-life insurers consider climate change a risk to their businesses, which means we need to look at solutions that make a difference.

Sometimes, we are asked why we are placing such an emphasis on climate change, and that's easy for us to answer.

Climate change could lead to material economic and financial stability impacts. Managing major risks to the economy, such as climate change, sits within our core responsibilities and like all of our functions, we do this with a long-term view for generations to come.

Globally, there is growing recognition of the role central banks and regulators have in understanding, managing and quantifying climate-related risks. By being more visible in this space we hope to encourage the financial sector to focus not only on managing risks, but on opportunities, such as sustainable investment with long-term benefits.

Too often, economic growth is viewed as something that comes at the expense of a sustainable environment, and that can't continue. Climate change is now well accepted as having a significant impact on economies worldwide. The impacts are physical through nature and financial through the changes we are seeing in consumer and investor preferences and regulatory responses.

Climate Change Strategy

Our overarching purpose is to promote the prosperity and wellbeing of New Zealanders so we have a sustainable, productive economy. To help achieve that, last December we launched our Climate Change Strategy.

This will help us to facilitate a smooth transition to a low carbon economy in a way that does not diminish or adversely impact on the financial system's soundness and efficiency. These include: managing our own direct impact on the climate, reflecting climate risks within our core functions, and contributing to wider efforts to identify, monitor and manage climate risks domestically — and as part of the global regulatory community. We are getting our own house in order by better understanding and measuring our own carbon footprint, then reporting on this annually. A preliminary screen showed the most significant sources of our greenhouse gas emissions are the production and transportation of currency and business travel. Knowing this helps us consider how we can reduce and offset these emissions.

We are also looking at how we can transition our investments to more sustainable alternatives. Last month, we affirmed this strategy through the purchase of US$100 million (NZ$ 157m) of green bonds via the Bank for International Settlements' USD Green Bond Investment Pool, launched in response to the growing demand for climate-friendly investments among central banks.

We now consider climate risks part of our fundamental role of assessing risks to the financial system as a whole, and ensuring these are communicated to the markets generally.

Risks to the financial system

In our two most recent Financial Stability Reports we explored the risks climate change is currently posing to New Zealand's financial system, which is primarily exposed through the sectors that it lends to and insures. Rising sea levels, storms, droughts, heavy rainfall events, and so on, can pose serious threats to us all and pose challenges for the banks and insurers who support economic activity. As our regulated firms respond, some risks may ultimately end up with other parties, such as central and local government.

An initial survey of the New Zealand financial sector showed the industry is aware of these risks. All banks and 90 per cent of non-life insurers consider climate change a risk to their businesses, which means we need to look at solutions that make a difference.

One solution is greater disclosure of institutions' exposure to, and management of, climate change risks, but this is best done in a co-ordinated, consistent way so markets, investors and regulators can make informed decisions. Currently, 60 per cent of surveyed banks and around a third of surveyed insurers already disclose information on climate risk. While this is great progress, we support further efforts towards a credible, workable climate reporting framework. And, because we can't solve the problem of climate change alone, we are connecting globally with our international counterparts via the Network for Greening the Financial System (NGFS) and the Sustainable Insurance Forum.

Greening the financial system

The NGFS was set up in December 2017 at the Paris "One Planet Summit" to strengthen the global response required to meet the goals of the Paris agreement, and brings together around 42 central banks from countries responsible for half of the world's greenhouse gas emissions. The network issued six recommendations for central banks, supervisors, policy makers, and financial institutions to enhance their role in greening the financial system, and managing environment and climate related risks. These include integrating climate-related risks into financial stability monitoring and micro-supervision; integrating sustainability factors into portfolio management; bridging data gaps; and building awareness and intellectual capacity. We are taking work forward in all these areas.

We are also seeking to work more collaboratively within our own region. Earlier this year, the nine Pacific central banks agreed a focus on climate change would be one of their priorities. They have invited the NGFS to an event in November on the impact of climate change on the Pacific's financial systems. The network's members are committed to understanding and managing financial risks and opportunities associated with climate change, with a key focus being scaling up green finance.

It's easy to forget that with risk comes opportunity. Climate change can feel overwhelming and leave people confused about what they should do to help, but that does not mean inaction.

As financial system participants we all need to actively look for opportunities to "finance the green" and help New Zealand firms and our own organisations transition to lower-emissions practices, and ensure we are well placed for a net zero world. It's heartening to see many businesses are well advanced on this journey. We now have a "road map" from the work of the Sustainable Finance Forum to help us navigate and focus our collective efforts.

Read the Sustainable Finance Report here.