No longer tomorrow's
problem:
How the Reserve Bank is
working with its stakeholders
to respond to Climate Change
A speech delivered to Chapter Zero New Zealand in
Auckland
By Adrian Orr, Governor, Reserve Bank of New Zealand
3 November 2023
Introduction
Kia orana tātou kātoatoa, tēnā tātou katoa,
Thank you for again inviting me to speak with members of the Institute of Directors.
I want to begin by acknowledging the mana whenua, Ngāti Whātua Ōrākei.
I'd also like to thank Chapter Zero New Zealand for organising this event and for the work they are
doing. You have created a truly meaningful network of business leaders, as highlighted by your
recent publication that provides directors' guidance in the development, analysis, and review of
climate scenarios.
In my inaugural speech as Governor1 in 2018, I spoke about the perils of short-termism in
economic and business decision making. Taking a short-term view means we risk ignoring social
and environmental harms (or negative externalities), leaving them as issues for our future selves to
resolve.
Former Bank of England Governor Mark Carney termed it a 'Tragedy of the Horizon'2 citing
climate change as the prime example. The need to take a longer-term view when approaching
business was one of the reasons the Reserve Bank of New Zealand developed its climate strategy
in 2018. We have been working to implement it ever since.
Overcoming Carney's 'Tragedy of the Horizon' doesn't have to be rocket science. For example, as
a prudential supervisor, we can help the participants and entities in the financial system to be more
aware of the risks and the opportunities in front of them, so that they can prepare for a rapidly
changing world.
Today I will talk about:
• Our climate-related work with prudentially regulated entities;
•
Our climate and sustainability collaborations domestically and internationally; and
• Our future intentions.
But before I do that, let me start by telling you about what our Act sets us up to do, and the role
of central banks in encouraging efficient financial risk management.
The Reserve Bank of New Zealand Act 2021
You may know that the RBNZ's governing legislation has been refreshed. The new Reserve Bank
of New Zealand Act was enacted in 2021, enabling us to evolve into a modern, fit for purpose,
transparent central bank.
Our Act gives us a legislative purpose of promoting the prosperity and wellbeing of all New
Zealanders and contributing to a sustainable and productive economy. Our roles include:
• Managing inflation to keep prices stable while supporting maximum sustainable
employment;
• Protecting and promoting stability within NZ's financial system;
• Producing New Zealand's banknotes and coins; and
• Operating effective wholesale payment and settlement systems.
As our 2018 climate strategy outlines, climate change intersects with and relates to all our
mandated roles.
Integrating climate-related risk in our financial stability efforts
Central banks are not the key drivers or arbiters of climate adaptation or transition finance.
Governments and markets, and in many respects good folk such as yourself, hold the keys in that
regard.
Collectively, New Zealand has recognised the need to adapt to climate change and efficiently
decarbonise. These needs are recognised in New Zealand's emissions reduction efforts to meet
the Government's stated Nationally Determined Contribution3 under the Paris Agreement.
However, an important role for a central bank is to help ensure the financial system functions
efficiently. An efficient system better recognises, prices, allocates, and manages economic risk as
information becomes available to do so. Climate change is one such risk.
Our financial stability objective4 compels us to adequately prepare for potential climate-related
risks to come. We do this through our policy settings and prudential supervision and oversight of
our financial institutions.
And we are not alone in this regard. More than 120 other central banks around the world have
joined the Network for Greening the Financial System with the express purpose of better
understanding and responding to climate-related risk.
As my counterpart at the Reserve Bank of Australia, Governor Michele Bullock, recently remarked
"climate change and the actions taken in response will have broad-ranging implications for the
economy, the financial system and society at large."5
The RBNZ is aligned with central banks all over the world in taking the financial risks of climate
change seriously. Long-term financial stability must not fall victim to short-term thinking.
I'll now touch on some work we are doing in that regard.
Our work with prudentially regulated entities
Stress testing
Stress testing is a tool used to assess the resilience of financial entities to severe but plausible
shocks. We've recently begun to include climate-related risks in our stress testing, primarily to help
ourselves, and the banking and insurance sectors, build capability in assessing the impact of
climate on financial stability.
Our General Insurance stress test in 2021 included a severe weather events scenario,6 and our 2021
bank solvency stress test incorporated drought coinciding with a severe economic recession. The
outcome was a spike in dairy loan defaults far greater than would otherwise be the case.
In 2022 our stress testing work with banks included assessments of a range of climate-related risks,
including coastal and inland flooding, drought, and emissions pricing. I encourage you to view the
results of those tests on our website.
New Zealand's five largest retail banks are currently undertaking a further Climate Stress Test,7
which is used to assess the resilience of their balance sheets to combined physical and transition
risks out to 2050. This scenario is now available on our website and we aim to publish the results of
the analysis in the first quarter of 2024. Our banks are using the stress test to prepare themselves
to better cope with the disruption climate change will continue to bring.
I also encourage you to read the Financial Stability Report8 published earlier this week which
illustrates some of the potential impacts of drought and emissions pricing in the sheep and beef,
and dairy sectors.
Guidance for regulated entities on managing climate-related risks
Something else that helps bring longer-term risks into focus is the guidance on managing
climaterelated risk we provide to our prudentially regulated entities.
We have prepared this guidance in alignment with guidance from the XRB and FMA, but it is
specifically tailored to the needs of our prudentially regulated entities. These are New Zealand's
registered banks, licensed insurers, licensed non-bank deposit-takers, and operators of designated
financial market infrastructures. Our guidance is intended to help all of our prudentially regulated
entities, whether engaged in mandatory disclosure or not, to manage climate-related risk
efficiently and effectively.
We published a draft version in March and received some helpful feedback that we're now
working through. When it's revised and in place, the guidance will also provide additional structure
to our supervisory conversations with our entities on climate.
Supervision
Which brings me to our supervisory role. Supervision is a critical conduit between prudentially
regulated entities and the RBNZ. It is how we assess, monitor, and support firms' ability to meet
our financial stability objectives and their adherence to our regulatory rules and expectations.
Climate-related risk is a priority theme at the Council of Financial Regulators (CoFR)9 and we are
collaborating on our supervision of climate change, particularly with the FMA.
We are also including climate change as a topic in our scheduled supervisory engagements with
management and boards, as well as standalone meetings with technical experts from the banks,
non-bank deposit takers and insurers that we prudentially supervise.
In doing so we discuss the responsibilities, oversight and implementation of entities' climate
strategies and risk management, and the practical steps they are taking toward preparing
climaterelated disclosures and transition plans.
Our domestic and international collaborations
Leading through collaboration, locally...
It takes collaboration for our financial system to better account for risks and develop resilience in
the face of climate challenges over the long term.
Alongside our domestic collaborations through CoFR we are also working with New Zealand
scientists and researchers to help identify data gaps and enhance our understanding of the
mechanics of climate-related risks.
We, and our prudentially regulated entities, are also collaborating more with Māori. Iwi, and Māori
more broadly, have distinct challenges, opportunities, and aspirations in the transition to a low
emissions economy. Iwi are already leading the charge in some cases to develop climate solutions.
For example, Ngāti Porou, Ngāti Tūwharetoa, and Te Arawa have taken up collective group
insurance policies for marae, lowering their costs through risk pooling and ultimately improving
access to financial buffers in the case of extreme weather events.10
Access to capital will also be crucial to accelerate investment in the Māori economy and
diversification towards lower emissions sectors.
At present the Māori economy is heavily invested in land-based sectors, primarily agriculture,11
which have high emissions profiles. Māori business activities are also heavily invested in transport,
construction, and manufacturing - high emissions industries which require significant capital
investment to reduce emissions.
Collective work that is underway to improve Māori access to capital will help to reduce transition
risks. Last year we published an Issues Paper on Māori Access to Capital.12 Now we are working
with retail banks, government agencies and iwi Māori to play our part to contribute to improving
access to capital.
...and globally
Efforts to improve systemic risk management require collaboration and leadership across
jurisdictions, and between the public and private sector to build the momentum they need to
persist.
As I highlighted earlier, we're deepening our understanding of climate-related risk through our
involvement in a global central bank network, the Network for Greening the Financial System
(NGFS). We are co-chairing an NGFS workstream: 'Net-zero for Central Banks'13 with Italy's central
bank - Banca d'Italia - covering three topics: sustainable and responsible investment (SRI), central
banks' own climate-related disclosures, and greening central banks' corporate operations.
We hope what we learn in these collaborations will be of use not only to central banks, but to the
financial sector as a whole.
Looking to the Future
In the five years since I spoke about the need for a longer-term view in the financial system, we've
made solid progress on establishing necessary practices and procedures. But much more needs to
be done.
Our own disclosure
To help structure our thinking we've committed to developing our first climate-related disclosure.
Like the 200 or so entities across New Zealand developing mandatory disclosures under the XRB's
New Zealand Climate Standard (NZ CS 1), we fully understand that effective disclosure processes
involve more than adding emissions data to an Annual Report or a declaration that we've talked to
a consultant about the future climate.
Developing a meaningful disclosure requires an in-depth interrogation of how your organisation's
strategy and core functions are affected by climate-related risks. For us that is a slightly different
ask - we need to look at our core functions as a central bank, including monetary policy, our
balance sheet, currency and payment systems, and our actions as a prudential regulator and
supervisor.
Monetary Policy
Like central banks around the world, we are growing our understanding of how climate change,
the macroeconomy, and monetary policy intersect. Disruptive supply-side shocks like those from
Russia's invasion of Ukraine and the pandemic foreshadow potentially similar supply-side shocks
from worsening climate impacts and an economy in transition.
Understanding the work to be done to transition to net zero will give us a sense of the potential
impact on employment and inflation in New Zealand. Observing policy developments domestically
and in other countries will help to develop our sense of how risks may affect the domestic
economy.
On the physical risk side, evidence for the macroeconomic significance of drought for the New
Zealand economy is well-established.
Our own research14,15 found that drought was an exacerbating factor during recessions, including
those triggered by the 1974-1977 oil price shocks, the 1997 Asian Financial Crisis, and the 2008
Global Financial Crisis, and that the drought of 2013 was macroeconomically significant.
While drought has historically been the greatest climate-related exposure the New Zealand
economy faces, climate change will also increase the frequency and severity of other events such
as storms and floods, as unfortunately seen last summer.
Climate-related risks demand our attention, but we shouldn't ignore the tremendous opportunities
the transition to net zero can bring. Disruption often brings opportunity. For example, research
and development in low-emissions technologies, new ideas which decouple economic activity
from material through-put, and novel adaptation-related goods and services.16
Vision for balance sheet
Related to their work on monetary policy, central banks around the world are increasingly
identifying and addressing the climate-related risks and opportunities in their own balance sheets.
RBNZ's balance sheet consists primarily of sovereign bonds for monetary policy implementation
and foreign reserves management. Assessing a sovereign bond for its past and potential future
exposure to climate-related risk requires data and careful consideration - especially when we are
trying to minimise our credit and liquidity risks.
Again, the NGFS workstream we are co-chairing with Banca d'Italia is a vital resource for us, with a
sub-group researching these new areas, identifying better practices, and sharing them amongst
central banks.
Climate resilient money and payments infrastructure
We're also working to ensure that central bank money continues to be available to the public
when and where they need it. Crisis situations like Cyclone Gabrielle demonstrated only too clearly
the lifeline nature of cash and payment systems.
Some retail banks have lost local capability through closing branches and reducing ATM numbers,
making them more reliant on roading, data and electricity networks at increasing risk of disruption
due to climate change. The cash system will need to adapt over time to continue to meet the
needs of New Zealanders, potentially including a new digital New Zealand dollar, to circulate
alongside physical cash.
What's on the horizon
In our work with other central banks and supervisors internationally we're fortunate to be part of
many discussions regarding the future direction of climate and broader sustainability issues.
Earlier this year, Australia and New Zealand's Ministers of Finance and Climate Change met in
Wellington, where among other things they agreed to align approaches regarding the
development of a sustainable finance framework.
Toitū Tahua -
the Centre for Sustainable Finance, and the Ministry for the Environment, are leading
the development of a taxonomy from the New Zealand side and I encourage you to engage with
them on that process.
Taxonomies can support the development of markets for climate and sustainability linked loans
and bond issuances, by providing clarity on performance expectations and reassurance to
investors that their climate and sustainability objectives are being met.
This work is vital where legitimate concerns around greenwashing could undermine investment in
the shift to a climate-resilient, low emissions economy.
In a similar vein, blended finance arrangements have also been a key topic of recent NGFS17 and
Bank of International Settlements discussions.18 Catalysing private sector finance flows with public
resources has been identified as a key lever of transition. However, to get the public-private
capital mix flowing, policy makers and private sector actors need better data, information
transparency, and certainty on the development and rollout of emissions targeted technologies
and regulations.
Conclusion
Tackling climate change is both an enormous challenge and an opportunity that we all have an
obligation to respond to. It remains within our power to take the steps required to transition our
economic and financial systems.
It will take concerted, collaborative efforts, but remains eminently achievable. More than that, these
are critical shifts we need to make if we want our New Zealand companies to be best positioned to
thrive in a net zero world.
Central banks have a supporting role to play. We can provide the financial system with processes
and functions like stress testing and prudential supervision which help keep long-term goals in
focus, and we can keep the risks front of mind for financial entities. We can also provide guidance
and information to help markets function more efficiently, reflecting global advances in risk
management and climate-related risk analysis. And we can facilitate collaboration between those
developing and sustaining transition finance mechanisms.
Many of you are already engaged in this work and I want to thank you for your efforts. I'd also like
to thank the banks, insurers, policy makers, agriculture sector organisations, iwi and NGOs - who
have taken such a keen interest, made demonstrable commitments and taken actions over the
past few years. This has been both exciting and inspiring to witness, and it's just the start.
Changing the future will take us all putting our shoulders to the wheel. But there's many of us
engaged in this mahi, and none of us are carrying the burden alone.
At RBNZ we are doing our part to provide some of the key tools and processes that allow our
financial system to more clearly see that future and realise it. I hope you'll join us in that.
Thank you.
References
Bullock, M. (2023, August 29). Climate Change and Central Banks [Speech Climate Change and
Central Banks]. https://www.rba.gov.au/speeches/2023/sp-dg-2023-08-29.html
Carney, M. (29 C.E., September). Breaking the tragedy of the horizon - climate change and
financial stability [Speech Breaking the tragedy of the horizon - climate change and financial
stability].
https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizonclimate-change-and-financial-stability
Council of Financial Regulators. (n.d.). Climate-related risks. Retrieved from
https://www.cofr.govt.nz/priority-themes/climate-related-risks.html
Improving Māori Access to Capital. (2022, August 9). Retrieved from Reserve Bank of New Zealand
website: https://www.rbnz.govt.nz/have-your-say/improving-maori-access-to-capital
Kamber, G., McDonald, C., & Price, G. (2013). Drying out: Investigating the economic effects of
drought in New Zealand. The Reserve Bank of New Zealand Analytical Note . Retrieved from The
Reserve Bank of New Zealand Analytical Note website:
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/analytical-notes/2013/an2013-02.pdf
McLeod, R., & Lam, V. (2021). Māori Financial Services Institutions and Arrangements. Reserve Bank
of New Zealand. Retrieved from Reserve Bank of New Zealand website:
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/analytical-notes/2021/AN2021-04.pdf
Menon, R. (2023, March). A supervisory push for transition planning and blended finance. Presented
at the Green Swan conference 2023. Retrieved from https://www.bis.org/review/r230601g.pdf
Ministry of Business, Innovation & Employment , & Ministry for Primary Industries . (2021). Māori
economy emissions profile. Retrieved from
https://www.mbie.govt.nz/dmsdocument/17448-maorieconomy-emissionsprofile#:~:text=Greenhouse%20gas%20emissions%20from%20the,6.4%25%20of%20New%20Zeal
and%27s%20GDP.
Ministry for the Environment. (2020). National Climate Change Risk Assessment for New Zealand
Arotakenga Tūraru mō te Huringa Āhuarangi o Āotearoa. In
https://environment.govt.nz/assets/Publications/Files/national-climate-change-risk-assessmentmain-report.pdf. Ministry of the Environment.
New Zealand. (2021). Submission under the Paris Agreement New Zealand's first Nationally
Determined Contribution. Retrieved from
https://unfccc.int/sites/default/files/NDC/202206/New%20Zealand%20NDC%20November%202021.pdf
NGFS publishes its 2022-2024 work program. (2022, May 30). Retrieved from NGFS Central Banks
and Supervisors website:
https://www.ngfs.net/en/communique-de-presse/ngfs-publishes-its2022-2024-work-program
Nicholls, K., & Samarasekera, R. (2021). Outcomes of the 2021 General Insurance Industry Stress
Test. [Review of Outcomes of the 2021 General Insurance Industry Stress Test.]. Reserve Bank of
New Zealand Bulletin, 84(2).
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/bulletins/2021/rbb2021-84-02.pdf
Orr , A. (2018, September). Geopolitics, New Zealand and the Winds of Change. Presented at the
Shaping Futures National Conference. Retrieved from
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/speeches/2018/speech-geopolitics-new-zealand-andthe-winds-of-change.pdf
Reddell, M., & Sleeman, C. (2008). Some perspectives on past recessions. Bulletin, 71(2). Retrieved
from
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/bulletins/2008/2008jun71-2reddellsleeman.pdf
Reserve Bank of New Zealand Act 2021, (2021).
https://www.legislation.govt.nz/act/public/2021/0031/latest/whole.html#LMS286981
Reserve Bank of New Zealand. (2023). 11/2023 Financial Stability Report. Retrieved from
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/financial-stabilityreports/2023/nov-2023/fsr-nov-23.pdf
Reserve Bank of New Zealand. (2023, October 10). Overview of the Climate Stress Test. Retrieved
from
https://www.rbnz.govt.nz/financial-stability/stress-testing-regulated-entities/climate-stresstest