Research Note: Climate of fear - How the Reserve Bank is overstepping its mandate

Research Note
9 November, 2021

On 26 October 2021, the Reserve Bank released Climate Changed 2021 And Beyond. The report, timed to coincide with the COP26 climate change summit in Glasgow, showcases the Reserve Bank’s efforts to reduce its greenhouse gas emissions and new climate change disclosure rules for banks.

This note reviews Climate Changed and the Reserve Bank’s treatment of climate change more generally. The Reserve Bank says climate change threatens financial system stability in two ways. First, rising seas and changing weather patterns will cause financial losses. Second, the transition to a low-carbon economy will also cause losses. Energy prices will be higher. Some assets will be stranded. The financial losses could lead to financial instability.

The Reserve Bank shares its view on climate change with 95 other central banks and financial supervisors in a group called “NGFS.”

The Reserve Bank and NGFS are correct that climate change will cause financial losses. However, neither provides credible evidence of a risk to the stability of the financial system due to climate change. Expected losses from climate change are not large enough to destabilise the financial system, and financial institutions have had decades to prepare. The risk to financial stability is unclear.

The Reserve Bank Act does not mention climate change. Without showing a link to financial stability, the Reserve Bank has no legal or democratic mandate for climate change.3 Its decision to single out climate change appears politically-motivated. This threatens the Reserve Bank’s independence on monetary policy and prudential regulation.

The Reserve Bank’s treatment of climate change is troubling:

• The Reserve Bank does not seem to understand how emissions policies work, or the consequences of those policies for its climate change strategy;
• It does not take into account existing financial stability protections such as minimum equity requirements for banks;
• The Reserve Bank has misunderstood New Zealand’s emissions targets;
• It does not explain, let alone provide evidence for, how its climate change disclosure reduces financial stability risks;
• Parts of the Reserve Bank’s argument on climate change are simply illogical.

Criticism of the Reserve Bank’s approach to climate change is not criticism of climate science nor of the commitment to lower emissions. Climate change is real. New Zealand should meet its emissions targets. The Reserve Bank’s siloed approach does not help.



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