A Near Horizon
Seizing the opportunities and managing
the risks in the transition to net zero:
The importance of climate-related
financial disclosures
Remarks delivered to a virtual roundtable
On 28 May 2020
By Adrian Orr, Governor
2 The Terrace, PO Box 2498, Wellington 6140, New Zealand
Telephone 64 4 472 2029 Online at www.rbnz.govt.nz
tēnā koutou katoa, welcome everyone
Talofa lava,
-
Thank you to the organisers McGuinness Institute, Simpson Grierson, and the Climate
-
Disclosure Standards Board for gathering us all for this important discussion.
Thank you also to Mr Mark Carney. I want to acknowledge your role in shifting the global
financial system to a more sustainable perspective. You shook us awake with your 'Breaking
the Tragedy of the Horizons'1 speech in 2015. Now, only five years on from your speech, a
common topic across central banks and financial regulators more broadly is how can we
best assess and address climate risks.
I also acknowledge the Climate Change Minister, James Shaw, and his personal
commitment, financial expertise and leadership on this very important issue.
Today I will speak briefly to three points:
 Why climate matters to New Zealand's financial stability;
 The Reserve Bank's climate strategy; and

The impact of COVID-19 in terms of risks and current opportunities.
New Zealand's Financial Stability
Why climate matters -
We use the Māori legend of Tāne Māhuta to tell the story of the Reserve Bank (Te Pūtea
Matua).
Tāne Māhuta - - separated the earth mother (Papatūānuku) and
god of the forest and birds
the sun could shine in and life could flourish. Thereafter, Tāne
sky father (Ranginui) so that
Māhuta served as the kaitiaki -
(guardian) of the forest ecosystem protecting against threats
and enhancing the wellbeing of everyone within it. Hold on to that image of Tāne letting the
- I'll get back to it.
sunshine in
At the Reserve Bank, we are the kaitiaki of the financial system tasked to maintain and
enhance financial stability. Assessing material risks to banks and insurers, and the financial
system as an ecosystem, is our core business.
We see financial stability being best maintained when all relevant risks are adequately
identified, priced, and allocated to those best able to manage them2. Climate change and its
associated risks provide a direct challenge to financial stability. The risks are material but
extremely difficult to identify, price, allocate, and manage with accuracy.
In the jargon, 'market failure' is rife.
We simply do not know the true scope and scale of the environmental risks we take on
during our daily economic activities. Likewise, many of the material costs of our economic
decisions are 'externalised', that is, borne by others including future generations. There is no
obvious market or price for selling climate risk, and hence no personal reward for managing
it. And market participants often take a short-term, myopic, view in their decision making,
pushing longer term problems to the never-never.
What this means is that we will never have perfect information on the risks of climate
However, firms' disclosure on how they identify and manage climate change risks
change.
greatly assist to sharpen our focus. After all, it is what gets measured that generally gets
managed. And it is far often better to imperfectly measure something than ignore it
completely.
What we already know is that climate change holds far-reaching implications for New
Zealand's financial system.
These implications include physical impacts such as sea level rise and drought. For
example, the National Institute of Water and Atmospheric Research (NIWA) estimates $12.5
billion of property is already exposed to extreme coastal flooding in New Zealand, and that
each 10cm of sea level rise puts another $2.4 billion of assets at risk.3
such as 'flight shame' or a shift to
Climate change also implies transition impacts -
plantbased protein that will pose unique challenges for our highly concentrated export economy.
Agriculture is already staring down the challenge of a triple whammy: emission pricing,
changes in consumer demand, and more extreme weather.
The Reserve Bank's climate strategy
Our climate strategy at the Reserve Bank has three avenues: incorporating the impact of
climate change into our core functions; managing our direct impact on the climate; and
leading through experience and collaboration.
Firm disclosure of climate risks assists all three avenues. Disclosure will enable risk
assessment and mitigation, and incentivise investment in emission reduction and adaptation.
Disclosure does this by subtly changing the rules to the game-without changing the game.
Firms' behaviour will change by directing attention to - 'you manage
climate-related risks
3
Niwa (2019) Coastal Flooding Exposure under Future Sea-level Rise for New Zealand. Accessed at
https://www.deepsouthchallenge.co.nz/projects/national-flood-risks-climate-change. A second study, of
modelling flooding from rainfall and rivers, estimated that around 411,000 were currently exposed along
with 20 airports and 3400km of electricity transmission lines. Niwa (2019). New Zealand Fluvial and
Pluvial Flood Exposure. Accessed at
https://www.deepsouthchallenge.co.nz/projects/national-floodrisks-climate-change
what you measure'. While investors' behaviour will change as they see both climate risks
and opportunities.
Even then leadership will still be needed.
Our survey of New Zealand insurers and banks last year found broad concern that climate
change exposed the financial system to significant risk. But, we disappointingly found scant
evidence that the climate risk concerns are influencing daily business decisions.
The lack of action may relate to the partial awareness. Only 60 percent of surveyed banks
and one third of insurers disclose some climate-related information.4 This creates
inconsistent information and comparability, leading to uninformed decisions.
Hence, we support the mandatory disclosure of climate risk, especially one that is
collaborative in approach with industry. There are important challenges to making disclosure
effective in meeting New Zealand's carbon reduction objectives
- including standardised
measures and climate scenarios, and sound data management and interpretation. We need
to get this right.
Recently we stepped up our supervisory engagement on the identification and management
of climate risks amongst New Zealand financial institutions. We also lead the Council of
Financial Regulators'
work on the climate challenge, including helping to develop a shared
programme to train regulators in climate risk disclosure.
We do so with haste because any delay in disclosing climate risk increases the likelihood of
a disruptive step change to our economic prosperity and social cohesion. Disclosure plays a
key role in ensuring a smooth transition to a low carbon emission future.
We encourage those banks and insurers who don't already disclose
climate-related
information to hurry up and do so. You need to support our collective objective of enhanced
financial stability.
We will keep going harder on climate. As a member of the Network for Greening the
Financial System we are working with 66 central banks, supervisory agencies and
international financial institutions to develop a coordinated response to climate. As part of
this, we are looking at options for better managing our own balance sheet to mitigate climate
change risk and promote climate change adaptation more broadly in New Zealand.
The impact of COVID-19
Like climate change, COVID-19 highlights interdependencies between economic prosperity,
environmental sustainability, and social inclusion. COVID-19 has done something climate
4
https://www.rbnz.govt.nz/financial-stability/financial-stability-report/fsr-may-2019/industry-surveyon-the-potential-impacts-of-climate-change
change has struggled to do: engage everyone on Earth. We have all been disrupted. As the
Economist newspaper noted last week: "Following the pandemic is like watching the climate
button."
crisis with your finger jammed on the fast-forward
Our current response to COVID-19 in New Zealand shows that when the risk is acute, we
can act together in a powerful, effective response. This is motivating: with climate change
the risk is also acute.
The current economic regeneration challenge requires bringing forth opportunities to reduce
carbon emissions and adapt. We need to ensure that whatever we rebuild, reshape or invest
in now is sustainable, long term in its horizon, helps us build climate resilience, and benefits
generations to come.
is significant but, as has been said, 'The best time to plant a tree is 20 years ago.
The task
The second best time is now'.
Conclusion
I'll return to Tāne
Māhuta and his efforts to let the sunshine in so life could flourish.
Disclosure is a tool to let in the sunshine. Better information to make better decisions. The
degree to which climate change remains a 'tragedy of the horizons' depends on our ability to
make better decisions today.
Thank you.