Should the Reserve Bank of New Zealand (RBNZ) become the world's first central bank to have an explicit climate change objective enshrined in its legislation?
This prospect is floated in phase two of the government's review of the RBNZ Act. A consultation document released as part of the review notes current and proposed RBNZ objectives "may permit" the RBNZ to act on climate change, but they don't explicitly require or encourage it to do so. Thus if stakeholders are concerned the RBNZ won't be proactive enough, there are options available to ensure a role for the central bank in fighting climate change.
These include "an explicit climate change objective," the consultation paper says.
"To our knowledge, no central bank has an explicit climate change objective in its legislation. This is partly because climate change is one of many risks that central banks must consider when overseeing the financial system, and including it could risk diverting too much attention from other risks, e.g. cyber risk. Nevertheless, if stakeholders were concerned that the mechanisms above [surveillance of individual financial services firms' exposure to climate risk, climate related financial disclosures, promoting green finance] were insufficiently durable to embed climate change in the Reserve Bank’s regulatory approach, an explicit climate change objective could be included in the Reserve Bank Act," the consultation paper says.
Another option floated is issuing an overarching direction to take into account climate change in the RBNZ's activities.
"The Reserve Bank Act already gives the Minister of Finance the power to direct the Reserve Bank in certain areas. Such powers could be used to increase the Reserve Bank’s focus on climate change issues," says the consultation paper.
The RBNZ published a Climate Change Strategy in December last year.
"Reserve Bank supervisors contacted registered banks and licensed insurers in early 2019 requesting information about how they currently identify, manage and disclose climate risk. The high-level findings of this survey were published in the May Financial Stability Report. All banks and 90% of life insurers thought climate change poses a risk to their business, while 60% of the non-life insurance sector thought so," the consultation paper says.
"Internationally, there are several initiatives underway to improve how climate-related risks are disclosed and managed. Central banks and supervisors of many developing and advanced countries, including New Zealand, have formed a Network for Greening the Financial System (NGFS), an international forum to build understanding, share experiences, and develop good practices around the supervisory and macro-financial dimensions of climate-related risks."
"Elsewhere, the Financial Stability Board’s Taskforce on Climate-related Disclosures (TCFD) has been leading the development of consistent and effective climate-related financial disclosures for organisations (both financial and non-financial firms) to help their customers, investors, and the public measure and respond to climate change risks. In 2017, the TCFD released recommendations for climate-related financial disclosures that have been widely endorsed by industry and officials alike, including the NGFS," the paper adds.
Meanwhile in New Zealand, the Ministry of Business, Innovation and Employment and the Ministry for the Environment are together exploring the possibility of developing a climate-related disclosure regime for a wide range of entities.
"The Reserve Bank may wish to support the development of this disclosure framework, and supplement with further requirements for registered banks and licensed insurers as appropriate."
Questions for consultation include:
What do you think are the strengths and weaknesses of the Reserve Bank’s current approach to supervision and enforcement?
Do you think that the Reserve Bank’s planned approach to the supervision and management of climate change-related risks is appropriate and adequate?
Do you think that the Reserve Bank’s approach to climate change would be different if it was given a more explicit climate change objective?
The deadline for submissions on the consultation paper is 5pm on Friday, August 16.
Finance Minister Grant Robertson announced the RBNZ Act review in November 2017.
“The current Reserve Bank Act is now nearly 30 years old. While it has served New Zealand well in general, now is the right time to undertake a review to ensure our monetary policy framework still provides the most efficient and effective model for New Zealand," Robertson said in 2017.
Phase 1 of the RBNZ Act review focused on monetary policy.
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21 Comments
Having trouble understanding what the RB would actually do about climate change. For example does it ensure insurance companies will insure coastal properties or is it the opposite and forcing them not to insure coastal properties? Same applying to banks willing to gtrant mortgages for coastal property?
Either way someone will be upset so why not just leave it as buyer beware?
As supervisor and regulator they can at the very least require, and inspect, that climate change risks are being overtly and sufficiently identified and managed (whether on or off balance sheet). Amongst other things They can also assist other regulators with regard to consumer issues and disclosure.
But why the need to specify Climate Change? It's just another risk isn't it? Do banks have to specifically monitor risk of loans to businesses that might be ripe for disruptive technologies? Or agriculture for the next pathogen or pest that makes it into New Zealand? Or the next commodity price slump?
Good point. If climate change sea levels changed as fast as they did after the last ice age (average of 20mm per year instead of the current 2mm) then banks, insurance companies and home owners would have maybe 10% of NZ property at risk in say 25 years - a giant financial pain but manageable over the time period. Compare with foot and mouth and other pathogens - they would stop major export industries in minutes not years.
A potential buyer of a Sth Is east coast village home, intending to retire by the sea, saw a red flag on the LIM so asked their insurance company if they would insure the property. No, was the reply. Consequently the potential buyer walked away. Coastal erosion and liquefaction were considerations to turn insurance down they were told.
I wonder how many potential buyers now ask their insurers before they buy, if their intended purchase is insurable?
Pure POLITICS in action, nothing more nothing less.
All risks are already factored into banks and insurance profiles, maybe we are angling for more bum's on seats or another govt investigation.
The atmosphere contains around 3.7% of CO2 with 98% of that CO2 non-man made.
I can't see why climate change should be singled out as deserving special attention above any other risk. This is virtue signalling at its worse. Of course this will increase compliance costs for banks and ultimately consumers. But of course the government won't bear the cost.
If they seriously wanted to do anything about climate change, they would raise interest rates to the point that collapses the economy.
Every component of GDP ((C+I+G+(X-M)) is almost entirely dependent on a massive energy surplus via fossil fuel.
As they have have no understanding that energy is the true driver of economic activity, they will do nothing.
Their jobs depend on it.
Well said. Actually, I'm sure they have heard of the energy problem, via this site.
But they'll avoid, extend, pretend. That's their 'job'. The ones who will put the brakes on are the insurance companies - they have to deal with the real. In the years to come, I suspect it will become impossible to insure boats in places possibly in the path of the more-frequent, more-powerful cyclones. I'd expect that to include the north and east of the North Island.
Perhaps the RBNZ could manage diabetes and gun violence too. I mean if you set the OCR just right? Come on. Seriously. According to Richard Werner even inflation targeting is nonsense. The RBNZ should be responsible for bank stability! If you wanted to include anything else then surely it would be productivity. Controlling what banks lend on, more business and less asset speculation.
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