On 29 March 2023, the Reserve Bank of New Zealand (RBNZ) released draft guidance (Guidance) and an accompanying consultation paper (Consultation Paper) on managing climate-related risks. The Guidance will apply to all RBNZ's regulated entities (Regulated Entities), including registered banks, licensed insurers, licensed non-bank deposit takers, and operators of designated financial market infrastructures.
'Climate-related risks' are defined as "the potential negative impacts of climate change on a Regulated Entity". The Guidance is intended to inform and encourage all Regulated Entities to develop and implement good practices for managing climate-related risks. Not all the suggestions in the Guidance will be relevant for every Regulated Entity, so each Regulated Entity should consider how the Guidance best applies to its business model and activities.
The Guidance does not impose formal obligations on Regulated Entities, however it is the view of the RBNZ that "the costs to an entity of taking appropriate steps to improve its management of climate-related risks and its resilience to climate change over the longer term should be outweighed by the benefits of doing so". The RBNZ has not ruled out issuing enforceable requirements in the future if it considers it appropriate.
What are the main features of the Guidance?
The Guidance covers the following areas:
- Climate-related risks: introduces the concept of climate-related risks, encourages Regulated Entities to maintain a transition plan, describes how climate-related risks could impact Regulated Entities and describes the elements of climate-related risks that distinguish them from other risks
- Governance: sets out roles and responsibilities for a Regulated Entity's governance body and senior management to manage climate-related risks and reinforces the importance for governance bodies to oversee climate-related risks (and opportunities)
- Risk management: discusses how climate change should be managed within a Regulated Entity's wider risk management framework. This includes using the governance body's approved risk statement, risk management strategy and business plan to identify, measure, monitor, manage and report on the Regulated Entity's exposure to climate-related risks where appropriate
- Scenario analysis: discusses how scenario analysis and stress testing can be used to evaluate the resilience of a Regulated Entity's business model and strategy in the short and long term
- Disclosure: refers to the new mandatory climate-related disclosure (CRD) regime in New Zealand (see our article - Mandatory climate-related financial disclosures in New Zealand) developed by the External Reporting Board (an independent Crown Entity) and the Financial Markets Authority. Any entity subject to these requirements is known as a climate reporting entity (CRE). RBNZ states that the Guidance is intended to complement the CRD regime. The CRD regime focuses on disclosure for CREs, while the Guidance focuses on what Regulated Entities should do to manage their climate-related risks effectively and makes other disclosure recommendations. The CRD regime and the Guidance also cover different thematic areas. The Guidance recommends that all Regulated Entities who are not CREs consider mandatory disclosure under the CRD regime for their own climate-related risk disclosure to the extent it is appropriate for them.
Moving forward
We recommend that all Regulated Entities read the Guidance and the Consultation Paper and determine which areas of Guidance may impact their business. The RBNZ has asked for submissions to be provided by 5pm on Wednesday 7 June 2023. The RBNZ is seeking feedback on the Guidance and whether issuing the Guidance is a better option than the status quo, which is to do nothing, or alternatively, whether the RBNZ should be imposing requirements under existing legislation for different sectors.
We recommend that Regulated Entities consider the Guidance and the Consultation Paper and whether they wish to make a submission to RBNZ. Subject to the feedback the RBNZ receives, the Guidance is expected to be finalised shortly after the Consultation Paper deadline in the second half of the fiscal year, October to December 2023.
If the Guidance is finalised, it is recommended that all Regulated Entities identify and manage climate-related risks relevant to their business, understand how material those climate-related risks are to their business, and follow the Guidance to the extent that climate change presents material risks to their business.
If you have any questions about how the Guidance would impact your business or would like assistance with preparing a submission, please contact a member of our financial services regulation team.
