Reserve Bank urges investors to green up their portfolios

Examine your investments and see how you can incorporate climate risk, says the Reserve Bank Governor.

Adrian Orr has drawn on his time running the NZ Super Fund to issue a resounding call to mum-and-dad investors to consider the climate when they decide where to put their money.

"I would encourage you to examine your portfolios and see how you can incorporate climate risk into the way you invest and allocate your capital," he said. "Working in unison we can make a larger impact than anyone could alone."

The Reserve Bank had just published its new statement of intent for 2021-24. The statement says understanding climate change and climate risks is of "critical importance" to financial stability, and there are costs for some sectors that must be managed and disclosed.

"Climate change presents a long-term risk to financial stability, with the physical impacts of climate change likely to increase," the statement says.

"We need to foster long-term decision-making with foresight for the needs of future generations of New Zealanders and work towards a zero-carbon economy. We can help support fit-for-purpose regulatory settings that encourage investment in sustainable finance and business practices."

It follows grim warnings in an international central banking network report, to which Reserve Bank of NZ officials contributed. "Climate-related shocks could generate financial losses for central bank balance sheets and, in extreme cases, they could affect the smooth implementation of monetary policy by exposing various monetary policy transmission channels to the impacts of physical and transition risks."

Orr was speaking to the Mindful Money Awards, and seemingly took to heart his new obligation to encourage sustainable investment. He recognised the importance of such organisations in empowering individuals to understand where their money is invested, through KiwiSaver or Investment funds.

"We believed that climate change represented a material risk which was not being properly priced by the markets."
– Adrian Orr, Reserve Bank

He recalled how, under his leadership, the NZ Superannuation Fund launched a climate change strategy to ensure the fund was more resilient to climate risks. The Fund has exited or reducing holdings in 300 firms as part of its carbon transition.

"We believed that climate change represented a material risk which was not being properly priced by the markets," he said.

Orr quoted the words of the Climate Change Commission: "Ināia tonu nei – the time is now."

For the Bank, promoting and maintaining a sound financial system included a global effort to understand and address the implications of climate risk for the economy, he said. "Starting now to get on the path to a low emission, climate-resilient economy as part of the global effort will help reduce the risks to the stability of the financial system and macro-economy."

The Reserve Bank's climate change strategy had three components: incorporating climate change into its core functions including the supervision of financial institutions; managing its direct impact on the climate; and leading through experience and collaboration.

"We also recognise that sustainability is critical for our long-term future and are considering how we can incorporate sustainability objectives into our balance sheet operations," he said. "However 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 objectives."

The Reserve Bank's new statement of intent says it will undertake work, over the next 12 months, to ensure its balance sheet is fit for purpose in light of legislative changes and broader policy objectives including climate change. A key focus would be on how it could incorporate sustainable finance into its investment framework and strategies.

The Bank is a member of the Network for Greening the Financial System, Orr noted, which brings together 90 central banks and supervisors to share best practice on climate change. New Zealand officials contributed to a new report by that Network, examining options for central banks to adapt their monetary policy operational frameworks to reflect climate-related risks.

The report warns that climate change remains "an urgent and fundamental threat" to global prosperity and collective well-being.

"Unlike for the pandemic, however, in the climate crisis we cannot see light at the end of the tunnel," write Network chairs Frank Elderson and Dr Sabine Mauderer. "The urgency to act is greater than ever: climate risks no longer lie beyond the horizon, they are already materialising. The time to take action is now."

The report, Adapting central bank operations to a hotter world, suggests climate shocks could cause losses to central bank balance sheets, but suggests ways central banks can adapt their monetary policy operational frameworks to reflect climate-related risks.

"At the very least, central banks should carefully assess, and where appropriate adopt, additional risk management measures to protect their balance sheets against the financial risks brought about by climate change," it says.

"According to current scientific evidence, taking no action is not viewed as a sustainable option given the systemic impacts of climate change on the real economy, on financial risk, on market prices and thus on the conduct of monetary policy and on monetary policy frameworks. At the same time, central banks need to be mindful about the potential risk involved in considering adjustments based on what is still a limited body of information, which may have an impact on their credibility."

This report analyses possible changes to three of the most important policy fields: credit operations, collateral policies, and asset purchases. For instance, one option is to make Reserve Bank interest rates on lending to retail banks condition on those banks, in turn, contributing to climate change mitigation and decarbonising their business model.