We are often asked why are we concerned about climate change and what does this have to do with New Zealand’s central bank?

The remits of central banks around the world vary. New Zealand’s central bank, Te Pūtea Matua has a broad remit and is what we call a ‘full service’ central bank. This means we have a broad range of activities to achieve our purpose. We formulate and implement monetary policy, we issue bank notes and coins, we provide liquidity facilities, and we operate payment and settlement systems. Critically, we also have financial stability objectives – acting as a prudential regulator of banks, insurers and other institutions and monitoring the financial system. Our remit is reflected in our legislation as three key areas: economic, financial stability and central banking.

Our responsibilities therefore require us to understand the risks to financial stability. This means one of our ‘lenses’ is understanding risk from the perspective of the institutions we regulate as they are key pillars of our financial system. We also need to understand the environment in which they are operating, global and domestic. We do that in a number of ways – utilising our own expertise, analysis and understanding, leveraging the domestic and global networks we are part of and leaning on emerging and best practice. Lastly and importantly we learn from what we see and hear from our regulated firms directly.

Right now, climate change risk and the drive to understand climate change adaptation and transition is high on the list of risks that our financial institutions are worried about. They are working hard to understand, manage and price these risks.

They are also working hard to help their customers understand these risks - whether they be residential mortgage holders, business customers, or insurance policy holders.  It is what we expect from our regulated firms and particularly the larger institutions who hold such significant roles in our financial eco-system. They are ahead of us in many areas in their understanding of climate risk and the impacts on their own business and that of their customers, but we are all working together as fast as we can to understand what needs to change in the way we think about risk, financial stability, the way we regulate, and the way we operate our businesses here in New Zealand. This is part of any prudent approach to managing risk – although we all agree climate is unique in its presentation, its scale and potential impact.

As with any successful business or strategy – there is little downside in being prepared for potential challenges. We are no different as a central bank and as kaitiaki of the financial system. To ignore the sentiments of 100 plus central banks and supervisors globally on climate risks and impacts on financial stability would be irresponsible.  To ignore the fast moving wall of capital moving away from carbon intensive industries would also be irresponsible. To ignore rapidly changing consumer preferences is a choice to be left behind and become irrelevant.  Added to all of this is the uncertainty on future policy settings which can have immediate and far reaching impacts.

These mind-set shifts will require us all to be courageous but to also be humble. We don’t know what we don’t know, we need others to help, and we need to think in much longer time horizons than ever before. We won’t always agree on best approach, the best science, the best data, but from our work so far the sentiment across the financial system is that we need to act and we need to start. The scale of climate change will require us to collaborate domestically and globally more than we ever have before. That approach in itself seems to hold very little down side for Aotearoa New Zealand.