Sustainable Business: Working together on path to climate-resilient future

Op-ed from Reserve Bank Assistant Governor Simone Robbers

The sense of urgency in confronting climate change is resounding. In its recent advice to the Government, the Climate Change Commission (the Commission) said it best: “Ināia tonu nei – the time is now.”¹ The Network for Greening the Financial System (NGFS) made a similar call earlier this year: “The urgency to act is greater than ever: climate risks no longer lie beyond the horizon, they are already materializing. The time to take action is now.”² The NGFS brings together 90 central banks and regulators – including the Reserve Bank of New Zealand – Te Pūtea Matua – to share our developing climate risk policies and practices.

As the systemic impact of climate change on the economy and the financial system becomes clearer, the responses of central banks and regulators around the world have been evolving rapidly too.

While there’s variation in our individual mandates, at their heart they are about stability. Stability in terms of prices – monetary stability. And stability in terms of the broader financial system – financial stability. Climate change is a direct challenge to this stability. The environment on which we’ve built our economy and society is changing as the physical impacts of climate change – like drought and storms – put urgent pressure on the world around us. At the same time, shifting to a lower-carbon economy will mean significant changes to industries and economies that were historically built on cheap access to fossil fuels. Combined, the risks associated with these changes relate directly to the mandates of central banks. In this context, it’s clear that central banks have the opportunity, and the responsibility, to take action on climate change.

For us at Te Pūtea Matua this means starting out now on the path to a climate-resilient economy as part of a global effort, which will help us manage the risks posed by climate change to the stability of the financial system and economy.

As stressed by many, the mahi must start now and it must come from everyone. Addressing climate change is a shared responsibility that requires a collective response. Many of the primary levers are with Government. Others are with businesses, communities and families.

At Te Pūtea Matua, a key concern is the exposure of the financial sector such as banks and insurers to climate-related risks. Global understanding of climate risks is evolving along with the understanding of how they impact financial stability. Markets move quickly once a critical mass of information is available.

Our approach to climate change recognises the imperative of working together. We have adopted a deeper understanding of our vision through the concept of Matangirua ki Matangireia – working in unison, to fulfil our ultimate purpose. We can all embrace this concept to achieve our climate ambitions. Our submission to the Commission’s consultation³ stressed the need for a coordinated and aligned approach – across central and local Government, as well as regulators. We emphasised the need for an approach that draws together both emission reduction and climate adaptation. As far as we can, we need to coordinate our efforts.

Last year, we collaborated with the Financial Markets Authority to upskill our supervisors on climate risks and climate-related financial disclosures. We covered an introduction to climate-related risks, the relationship of climate related risks to traditional financial risks, and the Task Force on Climate-Related Financial Disclosures’ risk framework. We will continue this collaborative approach, working alongside our fellow members of the Council of Financial Regulators.⁴

We are also excited to be contributing to the next stage of the Sustainable Finance Forum as it launches the Centre for Sustainable Finance. We can’t underestimate the critical role of finance and financial markets participants towards New Zealand’s transition to a carbon-neutral, carbon-resilient economy. We all share the same goals and stand to benefit from market efficiency, financial stability and an orderly transition pathway.

Aside from providing leadership and collaboration, we are integrating climate considerations across our operations. Last year, we reported our verified carbon footprint for the first time and we are now working to develop an emissions reduction plan. We also recognise that sustainability is critical for our long-term future and we are considering how to incorporate sustainability objectives into our balance sheet operations. We are mindful that any changes to our balance sheet need to be aligned with our ability to effectively and efficiently execute our existing policy mandate but we and many central banks around the world can play a part.

We are also exploring how we can incorporate climate change into our stress testing for banks and insurers. Our 2021 stress test plan includes drought conditions in a bank stress test scenario and severe weather events in an insurance scenario.⁵

While we are pleased with our progress, we all need to do more and move with pace. Although it will take time and effort, we are committed, alongside the Government and other financial regulators globally. Confronting climate change requires a holistic and global response and we will be much more effective if we are all pulling in the same direction.

Of course there are challenges. One is identifying and managing risks. The risks from climate change are material but extremely difficult to identify, price, allocate and manage with accuracy. We need new tools, like increased disclosures and better taxonomies, to give us accurate information and frameworks for action. Another challenge is building capacity and awareness. While we already have started, we all need to continuously upskill our people in climate-related risks.

And once again, the key to overcoming these challenges is through collaboration and coordination. Matangirua ki Matangireia. We can make a greater impact when we work in unison rather than alone. Our unified and courageous efforts today will lead us into a more climate-resilient economy and sustainable future for the collective good of all.

First published on NZ Herald

References: