Mark Carney in conversation with Adrian Orr and James Shaw

Nau mai, haere mai. Amateur hour till I fell over. Tenneco tokoto. Welcome everyone. Thank you, Mark and Mark. I do want to thank the kind of McGinnis Institute for bringing this together, Simpson Grace, and of course the Climate Disclosure Standards Board. It is an incredibly important discussion. Thank you, Mark Mr. Carney. You shook us all awake with your speech 'Breaking the Tragedy of the Horizons' back in 2015. And I know the Honorable James Shaw was actually in the audience for that speech. I want to acknowledge our Minister for Climate Change and thank you for your leadership, your financial expertise, and your personal commitment and courage to this very, very difficult challenge that we have. Mark, Mark Carney. Five years ago, when they provided the speech, everyone was wondering what has this got to do at all with financial markets, particularly central banks and the dry business of regulating and providing financial stability. And now, as Mark mentioned, it is the most common activity across all central banks in the world and financial regulators, wondering how we can best be part of managing the transition into a low-carbon future, seeing it as a true risk. So well done, everyone. I'll talk very briefly on three issues: one, why does climate change matter to the central bank, the Reserve Bank of New Zealand? What are we actually doing about it? And what are some of the opportunities, just as Mark touched on at the end, of using the COVID-19 pandemic position to our advantage going forward? A real challenge at the Reserve Bank of New Zealand. Tipu TMR tour. We use the multi-legend of Tāne Māhuta to talk about where we fit into the Māori system. Tāne Māhuta has been given the great honor of having separated Mother Earth Papatūānuku and the Sky Father Ranginui apart to let the sunshine into the environment and to let things flourish. Tāne Māhuta then became the kaitiaki, the guardian of that ecosystem. The Reserve Bank of New Zealand is the guardian of the financial ecosystem here in New Zealand. Just as part of that, we recognize the importance of that sunshine being allowed, and I'm going to come back to that looking in our kaitiaki role. We are very, very used to assessing risks, both for individual firms but also for the financial system as a whole. And we need to promote financial stability. We think about financial stability when the risks have been adequately identified, they may be priced, and through that pricing, allocated to people who can best manage those financial risks. Climate change is a direct challenge to that financial stability. The risks to climate change are incredibly hard to identify in the near term. There is no real market for pricing, and hence no real reward for any one individual to be managing the risk. And often the risk is held by those people who are least able to manage it, i.e. it has not been allocated. So in the economic dragon, the market failure is rife. What it means for us is that disclosure is critically important. Firm disclosure allows the risks to be identified. It may not be perfect, but as Mr. Carney mentioned, what gets measured gets managed. And it's better to measure something imperfectly and manage it than to just assume it away, to ignore it. We know that there are significant implications for the New Zealand economy and New Zealand society through climate change, whether it's through the physical challenges: sea level rising, adverse weather interrupting key economic activities and society as a whole, as well as the transition challenges that we have as our prime minister outlined, heading towards a net zero world. You can get there very abruptly; we don't want to do that. We want a smooth transition. And some of those transition challenges are already with us. I think of our traditional agriculture staring down the face of three risks: emission pricing, they're saying 'why us'; changes in consumer behavior, people preferring plant-based protein; and of course more extreme weather. So these risks are real for some people. What are we doing at the Reserve Bank about it? Well, we're incorporating the impact of climate change right into our core functions: our monetary policy but also our assessment of financial stability. It is a key question that we ask in whenever we're doing our activity now. We also are managing our own direct impact on the climate. You certainly don't want to throw stones from a glass house. So we're making sure that we are doing our part, and we're hoping to be able to lead through collaboration and the experience that we're picking up internationally, particularly through our fellow global regulators. Disclosure sits at the core of all three of those avenues. Disclosure from firms of what the climate change risks they have and how they are managing them is critical for changing the game. Actually, I would say it's more changes of the rules of the game. It doesn't change the game itself; it allows firms to better understand their risks, their hold, and then better be able to manage them. And likewise, investors to be able to both alter their portfolios and take opportunities around climate reduction and climate adaptation. Even then, beyond disclosure, what we've found here in New Zealand is that leadership is still needed. And so I thank you, Mr. James Shaw. Our own survey at the Reserve Bank of insurers and banks last year found that there was a broad agreement around the concerns and the risks that climate change can bring. But I have to say, there was scant evidence of that concern changing business decisions. Part of that might be because disclosure and the awareness of climate change was pretty firm. Two-thirds of the banks we surveyed had some form of disclosure on climate change risks, but only one-third of the insurance. Hence, partial information, ability to level the playing field, and poor information leading to misinformed decisions. This is why we take disclosure as being critical, and we are very happy to support compulsory disclosure. We want to support compulsory disclosure, hopefully in collaboration with the firms and businesses who will be doing that disclosure. It needs to be effective, it needs to be meaningful. And to do that, we need the standardization that Mr. Carney talked about around the types of risks, the scenario tests, and also the way in which we aggregate and utilize that information to make better decisions. What else are we doing? No surprise, we're stepping up our supervision activities, particularly around climate-related risks. And our financial institutions are aware of that. We've been working very hard. I would say that any of the firms who are not providing any disclosure on climate risk should just hurry up and do so, and we will certainly be chasing that through. We're also working with all of the other financial regulators in New Zealand under this umbrella called the Council of Financial Regulators to have a more collective view so that there are no gaps, we can move as a single entity. And we are training our supervisors around the growing out of crime disclosure. As mentioned, we're working with the Network for the Greening of the Financial System. There are now 66 central banks, financial institutions, supervisory agencies, regulatory agencies around the world working on this coordinated response to climate change. So it's not a local hobbyhorse; we are actually just joining the party. People are always kind to say New Zealand's ahead of the game. I don't feel we are in the regulatory space. We are playing rapid catch-up, but we are small and nimble, so I'm sure we'll get there. Finally, we're looking at our own activities, particularly our own balance sheet. What do we need to be doing in managing the nation's foreign reserves, foreign assets? And how are we exposed both within that portfolio to climate change risks, but more importantly, how can we use that portfolio in our regular business to promote broader adaptation and climate change within our financial system institutions? I do hope to be able to talk more about that in the future. Finally, what is this opportunity about COVID-19? Well, it's hardly an opportunity if there's a dangerous situation that we run, and the economic impacts are coming through. We know there's going to be a massive rebuild, massive desire for physical stimulation, continued purchasing of assets. And I think The Economist magazine nailed it on the headers they do: they said 'Following the pandemic is like watching climate change with your finger on the fast-forward button.' It's a critical acute issue, COVID-19. So is climate change. New Zealand has shown its ability to suddenly rally together and work very, very consistently towards a good outcome. And I think this is our opportunity around the climate change issue to really work together and be global best. I'll finish back to the sunshine. Tāne Māhuta, who I said was the tree god, the sunshine. And disclosure is the sunshine in the financial markets. It allows better decisions to be made. And if we want to remove the tragedy of horizons, better decisions need to be made right now.

Thank you, Maddie. And it's a great question. And I think the short answer, before I give you a long one, is it would help immensely. It helps immensely in the sense that we suddenly have data, and useful data, that we can work with, both around understanding the macroeconomic implications, so aggregating up and using it for our monetary policy picks. As you know, these impacts on the ability for the country to supply of pastoral land or different activities would be taken out, and likewise aggregate demand is seriously impacted through all sorts of adverse conditions. So it helps us work our way through that. The simple drought in Northland and past the East Coast at the moment is the classic example. And the second part is that it helps us, as Mr. Carney was just talking about, to bring life to those stress test scenarios and have engaged conversations with the financial institutions, both the banks but especially the insurance people, to talk about we can see it, can you see it, what are you doing about it, how is that being priced? And I'm back to the sunshine, it brings the transparency into the whole action. And of course we can see whether we are improving on the way through at time. And it gives our supervisors, who will be the new highly trained climate disclosure experts, real tangible things to bring up with the CEOs and managers of the banks. And just while I've got the microphone as well, and sorry I just want to go back to Angela's question around using risk weights. I will remind the audience that globally the risk weights are always trying to be standardized internationally through that very dynamic group in Switzerland, the Basel Standards Committee. But that doesn't stop individual banks or financial institutions anywhere in the world still disclosing what they're doing and showing leadership. And likewise for the advanced banks, of which I know the ANZ and Westpac, it doesn't stop them from looking at their own risk weighting data and assessing whether there is a material difference between brown assets and green assets and how they're thinking that through. So showing that leadership, don't wait for the slowest common denominator called the single global regulator.

Yeah, thanks, Matt. I don't feel left out. Big question. Yeah, this really is the necessary versus sufficient. It's putting the information on the table, it's allowing investors, consumers to actually start to operate with the data, it's allowing firms to manage the risks, and so it's letting the relative prices, as I mentioned, start to do their role. That's the first part. The second part of course is I think it's just going to run into lots of other corner solutions where, for example, the world of accounting, and for us it's all too short term too often. There's not enough ability for firms to take really long-term decisions. It's very hard for investors to reap rewards that might be 30 years ahead. So it will force change in, I would say, the horizon over which business is done. As long as a lot of the climate change risk is considered an externality, it's not going to be properly managed even with the relative price. And there's still going to be a role for regulation and a better role for thinking long term. You know, for really the difference, if you think beyond three to five years, then there are no externalities. Everything related to social cohesion, environmental sustainability, cultural inclusion all come into the equation. Is my product sustainable? Are my profits for the long term and real economic profits?