Simon Upton, Parliamentary Commissioner for the Environment, tells banking inquiry its ‘entirely appropriate’ for banks and insurers to consider climate risks in order to ensure the sustainability of profits over time

Parliament's environment watchdog has warned MPs that banks and insurers aren’t going to stand behind people who invest in properties and businesses increasingly at risk from a wide range of climate pressures.

Simon Upton, the Parliamentary Commissioner for the Environment, told the Government’s banking inquiry this on Monday where he advised MPs to turn their attention to providing “some certainty” around the Government’s framework for climate adaptation.

In Upton’s view, this means helping the public to understand climate risks and to clarify the extent to which taxpayers will stand as a risk “backstop.” Upton described this as becoming an “increasingly urgent priority”.

“If we could do that, well, insurers and financiers will be in a better position to manage risks responsibly. But those risks are rising. You can't turn a blind eye to them,” he said.

“And certainly businesses who are in the business of managing risk can't afford to.”

Upton made these comments as part of his submission on Monday to the banking inquiry where he told MPs that in his view, it was “entirely appropriate” for banks and insurers to consider and manage changing physical risks in order to ensure the sustainability of profits over time.

“Physical assets can be literally washed away. Profitable businesses can become marginal or uneconomic as drought or rising sea temperatures take their toll,” he said.

“The physical risks posed by a changing climate are certain, it's just a matter of degree.”

Upton said the economics of renewable electricity generation, like solar PV (photovoltaics), has already put fossil generators “on notice of an inevitable transition”. 

“I think advances in battery technology will hasten that. We'll soon be at that point with electric vehicles. Now, these are genuine technological upheavals in major industries. There will be winners and losers, there’s no escaping that,” he said.

“And if banks shut their eyes to the risks of that sort of economic dislocation, they will be in trouble. They have to follow what the market is telling them.”

Upton used BNZ, which is planning to wind up all outstanding loans to petrol stations by 2030, as an example.

BNZ chief executive Dan Huggins told the banking inquiry last year that BNZ had made this decision because of the credit risk petrol stations could pose in the future, rather than being motivated by climate targets or policies. 

BNZ expects the conversion to electric vehicles to change demand for fuel services which Upton agrees with.

“Like it or not, petrol stations as we currently know them are on track to becoming a sunset industry. Now, it may be a long sunset, it may happen more quickly, I don't know,” he told MPs on Monday.

“But the economics of electric vehicles and the way they insulate us from oil price spikes will make that certain. I think trucks are another matter. Truck stations will probably be around for a bit longer, but as far as electric vehicles go, cars, light vehicles, we can say that's a trend which is probably unstoppable.”

Upton said this was not “terribly good news” for people invested in petrol stations — but that didn’t mean that the Government should somehow intervene. 

“New Zealand's been burned in the past by subsidising embattled industries. Banking is all about gauging and managing risks. And if an industry like petrol retailing is in decline, that's a risk banks can't and shouldn't ignore,” he said.

Teething issues

Upton said on Monday there were “valid teething issues” to deal with when it came to climate related disclosures (CRDs) but removing them entirely in the long run would “harm the competitiveness” of NZ’s businesses.

“What gets measured gets managed. And if we don't measure something, it doesn't get rid of the risk, it merely leaves us blind to the risk,” he said.

Around 170 financial market participants in New Zealand, including large banks, insurers, investment managers, and listed issuers, are now required to produce annual climate-related disclosures (CRD). 

These entities must meet specific asset or revenue thresholds to be subject to this mandate.

Although the Financial Markets Authority (FMA) is regulating the regime, when companies report on their annual climate statements, the companies have to follow standards from the External Reporting Board (XRB), based on guidelines from the Task Force on Climate-related Financial Disclosures (TCFD). 

The XRB decided on a principles-based approach instead of a rules-based one for CRD reporting in NZ which the FMA said last year had caused confusion for some companies. 

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