New Zealand central bank releases climate risk guidance for financial institutions

April 4, 2024|Written by Moriah Costa|Te Pūtea Matua / Reserve Bank of New Zealand

New Zealand’s central bank has released new guidance for financial institutions to manage climate risks, including both physical and transition risks.

The guidance from Te Pūtea Matua, the Reserve Bank of New Zealand (RBNZ) is non-binding and companies can decide how they want to apply the guidance to their business models, if at all.

“The guidance sets out our expectations of how regulated entities should be identifying, managing, and monitoring climate related risks. The guidance is not prescriptive, as entities are best placed to decide how to apply it to their business models and strategies,” Kate Le Quesne, director of prudential policy at RBNZ, said in a statement.

However, RBNZ noted that the guidance will inform supervisors on how they should integrate climate change considerations into their supervisory approach.

The guidance was updated after a consultation period to ensure it matched the Aotearoa New Zealand Climate Standards, which set out mandatory climate-related disclosures for around 200 financial institutions.

The guidance covers four main areas: governance, strategy, risk management, and metrics and targets.

Climate risk, like any other risk, is the responsibility of a financial institution’s board and can be managed within a company’s overall risk management framework, the guidance states. Senior management should be responsible for reviewing the effectiveness of the framework and tools and ensuring adequate resources are available to manage climate risks.

The RBNZ also recommended that financial institutions take steps to understand how climate change impacts them, including the interactions between climate-related risks and business activities, as well as possible broader transition risks.

The central bank also says companies should incorporate climate scenario analysis and stress testing “proportionate to an entity’s size, business mix and complexity”, as well as create a climate transition plan to “demonstrate how its business model and strategy can thrive in a low-emissions, climate resilient economy”.

In addition, the RBNZ recommends that institutions have enough financial resources to account for climate risks by incorporating climate risk as part of their Basel Pillar 1 calculations.

Finally, the RBNZ recommends banks use various data metrics to understand the current and future impacts of climate change on their business, using both public and proprietary data and ensuring that it is comparable and consistent.

The RBNZ has taken more steps recently to address climate risks, including conducting bank climate stress tests. Research from the central bank has found that drought due to climate change is likely to contribute to future recessions, while bank governor Adrian Orr said last year that the RBNZ needs to take more steps to better understand climate change’s impact on New Zealand’s economy.

This page was last updated April 4, 2024

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