The Reserve Bank of New Zealand - Te Pūtea Matua (RBNZ) is consulting on draft guidance for the financial sector on managing climate-related risks (Guidance).
Feedback on the Guidance is due by Wednesday, 7 June 2023, with a consultation paper available here and the Guidance itself available here.
Key takeaways from the Guidance include:
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The Guidance broadly complements the mandatory climate-related disclosures regime in the Financial Markets Conduct Act 2013 and related legislation (Mandatory Disclosures Regime), although the emphasis of the Mandatory Disclosure Regime is on disclosure and the Guidance adds an additional focus on substantive steps entities regulated by RBNZ should take to manage climate-related risks.
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The Guidance also includes some disclosure recommendations, and we suggest that regulated entities carefully compare their current processes and planned disclosures against the Guidance to identify any differences.
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While the Guidance is intended to inform and does not impose enforceable obligations, regulated entities have several incentives to implement it, including:
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The Guidance will likely inform the RBNZ's supervisory approach, which is expected to evolve over time. The RBNZ is aiming to have climate change considerations increasingly integrated into its supervisory, stress-testing and policy work by March 2024, and has already made progress on this strategy through its work on modelling flood risk.
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In relation to the Mandatory Disclosures Regime, primary users may have expectations in relation to an entity's compliance with risk management guidance issued by the RBNZ.
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The RBNZ has not ruled out introducing enforceable requirements at a later stage, and this could be influenced by the level of compliance with the Guidance.
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The Guidance applies to all entities that the RBNZ prudentially regulates[1] and is intended to help manage and assess climate-related risks and opportunities. It is divided into five topics: climate-related risks, governance, risk management, scenario analysis and disclosure.
At a high level, some of the key recommendations of the Guidance include:
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Taking a strategic, risk-based approach to managing climate-related risks and opportunities, including maintaining a transition plan and understanding the interaction between these risks and business activities.
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Ensuring that the governance body of an entity has ongoing oversight and management of climate-related risks and maintains mechanisms for monitoring delegated authority.
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Incorporating climate-related risks within an entity's broader risk management framework and establishing plans to mitigate these risks and manage exposures in line with the governance-body approved risk appetite.
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Developing capability in climate-related scenarios and stress testing to assess the resilience of the business model and strategy, using a proportionate approach based on the entity's size, business mix and complexity.
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Preparing for mandatory disclosures and considering additional voluntary disclosures that could benefit the entity by enhancing transparency and demonstrating its approach to measuring and managing climate-related risks.
In addition to seeking feedback on the substantive recommendations in the Guidance, the RBNZ seeks feedback on whether the Guidance is the appropriate course (as opposed to other options such as not issuing anything or imposing requirements under relevant legislation for each sector regulated by the RBNZ).
If you would like assistance in preparing feedback on the Guidance, please get in touch with one of the experts below or your usual Russell McVeagh or Te Whakahaere contact.