Retirement Life
3 March 2021

The financial risks of climate change

In March, the Climate Change Commission released its first draft advice to the government on addressing climate change. But while it focuses on how to “drastically reduce” greenhouse gas emissions, what does climate change, and the measures to reduce it, mean for New Zealand financially?

The draft report is now closed to public submissions, but included recommendations such as moving to electric vehicles, accelerated renewable energy generation, reduced livestock numbers and more permanent forests.

But the effects of climate change spread beyond the obvious. There are implications for the country’s financial stability too.

It’s something the Reserve Bank of New Zealand is taking seriously. Late last year Bank governor Adrian Orr described climate change as a “key risk to the financial stability underpinning the economy”.

New Zealand’s financial system is exposed to climate change risks through the sectors it lends to and the sectors it insures. It is impacted by both the physical and ‘transitional’ effects that go along with that.

Physical impacts include things like damage to property from severe weather events and changing property values such as houses and farms (i.e. coastal properties), along with disruption to supply chains.

The transitional impacts refer to the effects that occur as a result of the move to become a lower-carbon economy. This includes impacts from the regulatory changes, technological advances and changes in consumer and investor preferences that are likely to result.

Climate change in numbers

A report commissioned by The Treasury found that conservatively, climate change had cost the New Zealand economy at least $120m for privately insured damages from floods, and $720m for economic losses from droughts between 2007-2017.

Meanwhile, economic think-tank Motu published a paper stating that the Earthquake Commission should plan for future pay-outs for weather-related damage to be between nine and 25 percent higher than current levels, due to climate change.

These sorts of numbers affect businesses on the ground. Late last year Westpac became the first bank in New Zealand to report its exposure to climate-related financial risks. Its research shows that between two and three percent of its residential mortgage lending, commercial property mortgage lending and agricultural mortgage lending portfolios are potentially at risk from coastal erosion and flooding due to rising sea levels.

What happens next?

New Zealand is set to become the first country in the world to require the financial sector to report on climate risks. The government announced last year that about 200 organisations will have to make annual disclosures regarding their exposure in this area, or explain why they haven’t.  

This will include the big banks and large registered investment schemes, along with big insurers and large government financial institutions such as ACC and the NZ Super Fund. If approved by Parliament, this reporting will begin in 2023 at the earliest.

In the meantime, the Climate Change Commission will take its finalised advice to the government by the end of May. The government then has until December 31 to decide whether to accept the recommendations it offers. If not, it must publish an alternative plan for reaching ‘net zero’ by 2050 – that is, reaching the balance point between the greenhouse gas emissions produced by New Zealand and those taken out of the atmosphere. And then the work will begin.

 

Droughts cost the New Zealand economy $720m from 2007-2017.

Droughts cost the New Zealand economy $720m from 2007-2017.