The Reserve Bank will develop a guidance note on climate change risk management for banks, insurers and non-bank deposit takers, plans a climate change scenario-based bank stress test, and is working towards "fully embedding" climate risks into its core functions of financial stability and monetary policy.
These points are made in a climate change report released by the Reserve Bank on Tuesday.
“We recognise the need for more action than current, that is why we have laid out our commitments and future plans around climate change in this report,” Reserve Bank Governor Adrian Orr says.
Later in 2021 the Reserve Bank says it will start developing a guidance note on climate change risk management for the entities it regulates.
"The Guidance will support the Climate Related Disclosure plans and will cover governance, risk management, scenario analysis and disclosure. The guidance will not impose new requirements in relation to climate risks; rather it will support compliance with the [Reserve] Bank’s existing risk-management and governance requirements, and will provide guidance to assist entities to manage climate risks," the Reserve Bank says.
"Our approach will follow that of other appropriate regulators, for instance the Australian Prudential Regulation Authority and the Monetary Authority of Singapore, and will focus on physical, transition and liability risks. We believe that it will be crucial to work with our regulated entities to ensure that they are in positions to meet the new reporting expectations. We have heard from industry that key challenges include establishing appropriate scenarios, managing uncertainty, data availability, and capacity."
The Reserve Bank is the prudential regulator of banks, insurers and non-bank deposit takers including building societies, credit unions and finance companies.
The Reserve Bank says it's working closely with the External Reporting Board (XRB), an independent Crown entity tasked with preparing and issuing accounting standards and audit assurance standards. The XRB last week launched consultation on climate-related disclosures.
"The required disclosure will incentivise regulated entities to make progress on making robust long-term plans for responding to climate change and managing the emerging risks. We aim to support regulated entities by helping to develop a common understanding of what is needed and sharing best practice," the Reserve Bank says.
"While other agencies are in the lead on the design and implementation of disclosure obligations, the matters that the disclosure will cover fall mostly within our areas of concern as a supervisor."
'A full climate change scenario based industry stress test'
Meanwhile, the Reserve Bank says it's "learning ways" to further incorporate the risks of climate change into its bank stress testing, while improving capability.
"The plan is to build up gradually over the next 18 months to a full climate change scenario based industry stress test," the Reserve Bank says.
The Reserve Bank goes on to say that understanding climate change and climate risks is of critical importance to financial stability.
"Our foremost interest is the exposure of the financial institutions that we regulate to climate-related risks and their strategies to mitigate these risks."
"We are working towards fully embedding climate risks into our core functions of financial stability and monetary policy. In conducting these core activities, we must have regard to all relevant risks and operate according to appropriate time horizons," the Reserve Bank says.
"Climate change could have a large impact on our economy, so we must develop a strong understanding of the impacts it poses to our ability to conduct our monetary policy role effectively."
"We are currently assessing how our approach to monetary policy should account for the impacts of climate change. Climate change is a complex issue and we must make sure that we understand how it will affect the economy to effectively mitigate the attendant risks. Our approach to climate change is developing and we are continuing our research efforts," the Reserve Bank says.
The diagram below comes from the Reserve Bank report.