The Reserve Bank of New Zealand [1068Z:NZ], the country’s central bank, proposed new guidance for the financial sector on managing climate-related risks, as reported by Reuters on March 29. The draft guidance has been adapted from international best practices to suit the context of New Zealand and applies to all regulated entities, including registered banks, licensed insurers, licensed Non-Bank Deposit Takers, and operators of designated Financial Market Infrastructures. The document suggested entities develop their capabilities in climate-related scenario analysis and stress testing and take into consideration a range of plausible future climate scenarios, such as more frequent floods and droughts.
The guidance responds to concerns that the evolving climate-related risks could significantly affect the financial system in the future. Since the start of 2023, New Zealand has experienced a series of extreme climatic events, represented by the devastating flood that swept Auckland in January and Cyclone Gabrielle, an unprecedented natural disaster that battered the country in February. Insurance companies have already received more than NZD1bn (USD624m) worth of claims, and the government is also assessing the risks of rebuilding in some areas. For the stability of the entire financial system, the guidance laid out five sections, including climate-related risks, governance, risk management, scenario analysis, and disclosure, to help financial entities identify and manage climate-related risks effectively. It provides a clearer understanding of these critical issues and explained why these capabilities are vital for the growth of entities.