Climate Changed -
and why climate
matters to RBNZ.
A speech delivered at the Climate Change and Business
Conference 2022
On 19 September 2022
By Adrian Orr, Reserve Bank Governor
With thanks to Billy Berek, Susan Livengood, and other colleagues from the
RBNZ.
Ref #X775826 v1.16
Introduction
Kia ora koutou,
Thank you to the organisers for gathering us all for this important and necessary discussion.
Thank you to Bell Gully for sponsoring this session on "Disclosure and Managing Risk", and to
Simon Watt for chairing.
Thank you also to the many notable speakers and dignitaries at this landmark conference for
sharing your wisdom and insight.
I also acknowledge the Climate Change Minister James Shaw and his personal commitment,
and leadership on this very important issue.
Today I will speak briefly to a few points:
 Why climate matters to the Reserve Bank;
 Why the Reserve Bank has regard to climate change risk;

Our Climate Change Stategy; and

Developments in the management of climate risk here in New Zealand and around
the world.
But before I address those points, I want to place this conference in context. As noted in our
report, 'Climate Changed 2021', the impacts of climate change are already here, and those
impacts are increasing. These impacts do not happen in isolation, and compound other
economic shocks such as Russia's invasion of Ukraine as well as pandemic linked supply chain
shortages.
The last few months have had no shortage of extreme weather linked to climate change
across the globe, with record beating tempatures and droughts. Here in New Zealand, last
year set a new record for weather-related insurance payments, and this year is on track to
break the record.
Climate impacts are here now, and the risks of further impacts are here to stay. But there is
still much within our control. How we address those risks and the steps we take to reduce
them, are up to us. With appropriate identification, pricing, allocation, and management of
risk, we can reduce the impacts of climate change on Aotearoa's financial system. Disclosure
provides a vital impetus for this approach.
Why climate matters to the Reserve Bank
At the Reserve Bank, we are the kaitiaki (guardians) of the financial system tasked to maintain
and enhance financial stability. Our 'financial stability objective is to protect and promote the
1
stability of New Zealand's financial system.
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1
Reserve Bank of New Zealand Act 2021 (as at 01 July 2022) https://www.legislation.govt.nz/act/public/2021/0031/latest/whole.html#LMS286978
This objective is framed within the purpose of our legislation, The Reserve Bank Act, which is
to promote prosperity and wellbeing for everyone in Aotearoa and contribute to a
sustainable and productive economy. Historically, economic wellbeing and prosperity were
built with the benefit of a stable climate. As the climate continues to change, wellbeing and
prosperity are impacted. To deliver on this purpose, it's important that we understand this
context.
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 them. To meet our
financial stability objective, it's important for us to take account of the current and future
impacts of climate change.
The first Financial Policy Remit issued under our new legislation by the Minister of Finance2,
highlighted the desirability of the Reserve Bank having regard to climate change.
This means that we think about:

How we are working with our regulated entities to understand risks and contribute to
the resilience of New Zealand's economy, society and environment to the effects of
climate change; and
 How the financial system can play an appropriate role in supporting wellbeing and
resilience as it responds to increasing risks from climate change.
Our Monetary Policy Remit3 defines the Monetary Policy Committee's objectives: to focus on
keeping inflation between 1% and 3% over the medium term and supporting maximum
sustainable employment. While it doesn't currently have a climate component, the
macroeconomic consequences of climate change have impacts on monetary policy4, and we
have recently consulted with the public on the relevance of climate change for monetary
policy5.
Lastly, as a full service central bank we coordinate our thinking on financial stability and
monetary policy, and climate change is one aspect of this.
In short, to meet our financial and monetary policy objectives, it's important for us to
consider the impacts of climate change.
Our Climate Strategy
Along with many other central banks we have been working to better understand and
integrate climate considerations into our work. We published our climate change strategy in
2018. It has three key components:
1. Get our house in order: monitoring and managing our own climate impacts.
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2
Reserve Bank of New Zealand Act 2021 - Issuance of the Financial Policy Remit 2022 https://www.rbnz.govt.nz/about-us/responsibility-and-accountability/our-financial-policy-remit
3
Monetary Policy Statement 17 August 2022 https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/history-of-the-remit-and-policy-targets-agreement
4
Climate Change and Inflation, see Monetary Policy Statement November 2021 (rbnz.govt.nz)
5
We asked the public's views about the economy, what matters to them and how decisions that we make can affect New Zealander's daily lives. See
https://www.rbnz.govt.nz/haveyour-say/closed-consultations/monetary-policy-committee-remit-review
2. Get the settings in place: mainstreaming climate by understanding and incorporating
the impacts of climate change into our core functions, like prudential supervision and
financial system analysis.
3. Show the way: leading through collaboration.
Climate challenges
The financial system is a critical 'engine' that works to identify, price, and allocate risk. Climate
risks are evolving, and the market is working to come up to speed on those risks. But
historically, that engine hasn't fully addressed potential risks from climate change.
This is partly because we simply do not know the true scope and scale of the environmental
risks we take on during our daily economic activities. Transition risks have also proved
elusive: it's hard to identify a risk when the timing and magnitude of climate policies in New
Zealand or overseas are unknown. Likewise, many of the material costs of our economic
decisions are 'externalised', that is, borne by others including future generations. Solving the
moral hazard of transition costs falling on the present generation, while the benefits of those
actions (in reduced climate impacts) accrue to future generations, has proved a tall order.
What this means is that we will never have perfect information on the risks of climate change.
However, the mandatory climate-risk disclosure standards being developed by the External
Reporting Board (XRB) and to be independently monitored and enforced by the Financial
Markets Authority (FMA) will help start closing some of those information gaps. Firms'
disclosure on how they identify and manage climate change risks will help to bring those
risks into focus for management and investors alike. After all, it is what gets measured that
generally gets managed. And it is far often better to measure something imperfectly than
ignore it completely, in particular when this helps guide investor decisions. In measuring
climate risk, climate disclosure can shed light not only on those risks, but also transition
opportunities.
Briefly, without adequate disclosure to help identify and price risks, change may be disorderly
and much more difficult to manage.
Historically, the financial system has not fully accounted for the consequences of climate
change. But New Zealand's financial history is still being written - and disclosure has the
potential to be a key part of that story.
Integrating climate risk
Now I'll touch on some examples of how we are incorporating climate change considerations
into our work to help the financial system play its role in identifying, pricing, and allocating
risk.
Stress Testing
Here at the Reserve Bank, we began incorporating climate risks into our stress testing last
year. Stress testing is a tool used to assess the resilience of financial entities to severe but
plausible shocks. Traditionally, we have used this to explore financial stability risks during
economic downturns. Expanding this to include climate risks helps us and industry to build
capabilities to assess and understand the impact of climate change on the financial system.
In 2021, we introduced a climate change risk element into our annual solvency stress test, by
including a two-year North Island drought in the scenario. Our modelling showed that the
drought, on its own, did not create undue stress. However, when combined with an economic
downturn, the drought caused a 40% increase in dairy loan defaults over four years, before
returning to levels similar to today. This result illustrates the importance of nonlinearities in
the financial impacts of climate change.
Internationally, our central banking peers have also recognised the need to better understand
the financial stability risks posed by climate change. In May this year, the Bank of England
(BoE) published the results of its inaugural scenario analysis. Banks and insurers' projections
showed that "climate risks could cause a persistent and material drag on their profitability", IF
they "do not respond effectively" to physical and transition risks6. However, their results
"suggest overall costs will be lowest with early, well managed action to reduce greenhouse
gas emissions and so limit climate change". Closer to home, Australia's prudential regulator
launched their climate vulnerability assessment last year, with results set to be revealed later
this year.
When we began incorporating climate risks into our stress testing last year, we used a
scenario considering the impacts of drought in the North Island for large banks. We also
conducted our first insurance stress test. It included a scenario with more severe and frequent
weather events to gauge risks to insurers' capital.
This year, our approach entailed undertaking a series of sensitivities examining risks that
climate change posed to large bank's systemically important loan exposures: residential
mortgages and agriculture. Banks are currently working on both components: an assessment
of residential mortgage exposures to coastal and non-coastal flooding; and an assessment of
the agricultural sector's exposure to emissions pricing and drought risk.
This year's exercises will build our own and industry capability and inform our climate
scenario stress test next year. They will help firms meet the requirements of mandatory
climate-related risk disclosure, and allow us to examine physical and transition risks to
financial stability.
We are working with banks to create a streamlined process as part of the new disclosure
regime. Currently, our climate stress testing focuses on New Zealand's largest banks, but over
time we intend to build our support for other players in the financial system as they develop
their own climate risk assessment capabilities.
Alongside industry, we are collectively learning through this stress-testing process. We
believe this will help the financial system identify and manage climate-related risks.
Guidance note on Climate Change Risk Management
The Reserve Bank is working on draft text of a guidance note on climate change risk
management for our regulated entities. We aim to support regulated entities by helping to
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For evidence, please see Results of the 2021 Climate Biennial Exploratory Scenario (CBES) | Bank of England
develop a common understanding of what is needed to identify and manage the risks arising
from climate change, and sharing best practice. Our planned guidance will be part of this
support.
The guidance will not impose new regulatory requirements. Rather, it will be in line with the
self-discipline pillar of our supervisory approach, which emphasises that responsibility for the
sound and prudent management of a regulated entity rests with its board and senior
management. The purpose of the guidance will be to assist those responsible for running
firms to better integrate climate risks into their core risk management practises.
As you may be aware, the External Reporting Board's (XRB) final consultation for the
proposed draft standards on climate related disclosures closes next week, and the standards
will be published in time for the start of mandatory disclosure next year. We are coordinating
with the XRB and FMA to ensure consistency, and minimise overlap between our guidance
and the standards and guidance that will make up the disclosure regime. We plan to consult
on our draft guidance early next year.
We will consider the approach of other appropriate regulators, when developing our own, for
instance the Australian Prudential Regulation Authority (APRA) and the Monetary Authority of
Singapore (MAS). The guidance will focus on both physical and transition risks, and will cover
governance, risk management, scenario analysis and disclosure.
We have heard from industry that key challenges include establishing appropriate scenarios,
managing uncertainty, data availability, and capacity. The required disclosure will incentivise
regulated entities to make progress on making robust long-term plans for responding to
climate change and managing the emerging risks.
Supervision
Supervision is key to delivering on our climate strategy. It is a critical conduit between
regulated entities and the Reserve Bank and is how we assess, monitor and support firms'
ability to meet our financial stability objectives and their adherence to our regulatory rules.
Climate Change is an agreed priority at the Council of Financial Regulators (CoFR) and we are
collaborating on our supervision of climate change, particularly with the Financial Markets
Authority. Together with the FMA, we are including climate change in our scheduled
supervisory engagements with management and boards. Climate was a topic of conversation
at the most recent joint RBNZ-FMA workshop for banking directors and senior officers.
The next 12 months will see an increase in conversations with entities as we build our
understanding of the prudential implications of climate change. We will be discussing the
responsibilities, oversight and implementation of entities' climate strategies and risk
management, and the practical steps they are taking toward mandatory climate-related
disclosures.
A crucial part of this approach includes working with regulated entities as they set out to
meet the new Climate-Related Disclosure regime, and that the new disclosure requirements
will deliver the best outcomes for New Zealand in terms of the management of potential
risks. Our supervision teams are working closely with the agencies who are leading on the
design and implementation of disclosure obligations. We are collaborating on a survey of our
regulated entities. We'll send it to them early next year, to assess the challenges and
successes of the industry in understanding, managing, and disclosing climate-related risk.
Internally, we are supporting our climate supervision by expanding our training for
supervisors and integrating climate risks into our supervisory frameworks and data collection.
We are continuing to build our own knowledge and capability to support regulated entities
by developing a common understanding of what is needed and sharing insights.
Leading through collaboration, locally and globally
While our efforts to incorporate climate change into our core business address some aspects
of climate change risk, and the incoming mandatory climate-risk disclosure regime is a
welcome advance in identifying and managing those risks, there is still much to be done.
Global and local efforts to help the financial system identify, price, and allocate climate risk
are still in their early days, but modifications to the financial system's engine are coming.
Collaborative efforts locally, from the public and private sector, and from international
cooperation, are ushering in an era of significant change.
We're also coordinating with the New Zealand Bankers' Association and the Insurance
Council of New Zealand. Both are developing industry scenario analysis to prepare for the
incoming mandatory disclosure regime. We're also collaborating with New Zealand scientists
and researchers to help improve data and our understanding of these risks. For example,
we're a member of the Deep South National Science Challenge Representative User Group
and also engage with Whakahura - the Whakahura research project aims to expand our
understanding of extreme weather events in New Zealand.
As the financial system is truly global, any efforts to 'modify the engine' require collaboration
and leadership across countries, and between the public and private sector. Importantly,
these modifications to the financial system require some leaders to take the first steps.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS)
One way we've taken steps toward addressing climate risk is through our work as part of the
Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The
NGFS is made up of more than 100 central banks and supervisors who are collaborating on
climate change.
At the Reserve Bank of New Zealand, we're assessing the NGFS scenarios for use in our work
on understanding the potential impacts of climate change on financial stability in New
Zealand7. These scenarios may require additional local data sources to more accurately
project climate risks that New Zealand faces. We continue to engage with research projects in
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Network for greening the Financial System (2021) NGFS Climate Scenarios for central banks and supervisors
New Zealand and abroad aiming to build deeper understanding of risks and transmission
pathways.
We take the lessons from NGFS to build into our own climate change strategy. This includes
monitoring and managing RBNZ's impact on climate, reflecting climate risks within our core
functions, and contributing to wider efforts to identify, monitor and manage climate risks
within our economy and financial system, and as part of the global central banking and
regulatory community.
We're also active participants in the NGFS's ongoing climate work programme. Over the next
two years this will feature four workstreams and two taskforces on climate risk, climate
scenarios, and monetary policy. We are co-chairing the workstream "Net-zero for Central
Banks"8 with Italy's central bank - Banca D'Italia. This workstream will cover issues and
approaches on three topics: sustainable and responsible investment (SRI), central banks' own
climate-related disclosures, and greening central banks' corporate operations.
Classifying green or sustainable finance
One area that has seen significant advances is how we classify 'green', or 'sustainable'
finance. This work has been strongly encouraged by the NGFS9. To facilitate the economic
transition to a clean, resilient economy, it's important for businesses and investors to be able
to identify green investments, and potentially be aware of 'brown' investments. That's where
the development of classifications for green or sustainable finance comes into the picture.
Here in New Zealand, Toitū Tahua - The Centre for Sustainable Finance is taking steps to
jumpstart a framework for classifying sustainable finance10. Reserve Bank Assistant Governor
Simone Robbers sits on the board of Toitū Tahua.
Last month, Ministry for the Environment (MfE) published New Zealand's first ever National
Adaptation Plan (NAP)11. In addition to laying the groundwork for all of Aotearoa to adapt to
climate change, the NAP also proposes the development of "definitional tools" to promote
more investment in green projects. So we hope to soon see more work underway on the
development of a common set of definitions of climate and nature-positive investments.
In order for the New Zealand business community to keep pace with the international
community, identifying, pricing, allocating, and managing risks will become increasingly
important.
Conclusion
Shifting to a more sustainable, climate-resilient economy globally will need a coordinated
approach. Public and private sector knowledge and capital must be mobilised together. No
one group can tackle the challenge alone. The UN Environment Programme estimates, for
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Network for greening the Financial System (2022) NGFS publishes its 2022-2024 work program
9
Network for greening the Financial System (22/04/27 NGFS publishes a report on enhancing market transparency in green and transition finance
10
Through a unique combination of deep industry collaboration, high-calibre research, and exceptional education programmes, the Centre for Sustainable Finance is helping
financial institutions to play a leading role in building a more sustainable economy.
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Ministry for the Environment (03 08 2022) Aotearoa New Zealand's first national adaptation plan released | Ministry for the Environment
example, that global greenhouse gas emissions must be cut by 7.6% a year from now until
2030 to meet a 1.5°C temperature goal12. The International Energy Agency estimates that
such action will require US$ 3.5 trillion per annum until 2050 for energy sector investments
alone13.
Modifications to the financial system's 'engine' will be an essential feature of this financial
era, as the world seeks to avert the worst of climate change, while transitioning to a clean and
resilient economy. The significant modifications underway and still to come point to the great
duality of our time: that globally we are both doing more than we've ever done, and as of yet,
not nearly enough.
I want to thank those who already work tirelessly in this area, across the sector.
From banks to insurers, policy makers, the agriculture sector, iwi and NGOs - we've seen a
huge uptake in interest and commitment across the past two years, which is exciting and
inspiring.
It's up to us all to close the gap between what we are doing and what's needed to face into
one of the most complex challenged of our time. We must look not only to New Zealand, but
globally, to ensure our collective actions are making a difference.
At Te Pūtea Matua we will do our part to help understand and address potential risks to the
financial system and economy.
Thank you.
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12
United Nations (26 11 2019) Cut global emissions by 7.6 percent every year for next decade to meet 1.5°C Paris target
13
IEA (20 04 2017) Deep energy transformation needed by 2050 to limit rise in global temperature