The Reserve Bank of New Zealand (RBNZ) plans to cut its exposure to bonds of countries with a high carbon footprint, such as Australia and Canada, as part of its efforts to fight climate change.
At a press conference to release a report titled Climate Changed 2021 & Beyond, The central bank governor Adrian Orr admitted that the carbon footprint in its balance sheet is above a simple benchmark of a G7 weighted bond holding because it holds more Australian and Canadian bonds.
However, Orr said this is because the central bank has to make sure its balance sheet addresses the needs of implementing monetary policy, the liquidity needs of the financial system and also being the lender of last resort.
Australian and Canadian bonds give higher yields
The RBNZ has gone for Australian and Canadian bonds as it gets better yields from them, the governor explained.
“We would have to think hard about achieving the same effectiveness with a lower footprint. Can we get the same level of liquidity? Can we get the same level of credit assurance as we can? The choices that we have to be thinking about are the near-term revenue that we might have to give up to get the carbon footprint we can for the same level of effectiveness of the balance sheet,” he said.
The RBNZ is not alone in making the tough choices. Orr pointed out that even the Swedish central bank sold bonds from Canada and Australia because of the high carbon emissions in the two countries.
Australia sovereign borrowing costs could rise
Australia has already recognised the risks of other countries shedding its bonds if the country does not act against climate change. Earlier this month, Reserve Bank of Australia’s Deputy Governor Guy Debelle said that the cost of capital for the Australian government and Australian businesses can rise.
“Climate comes up in most conversations I have with foreign investors…Australian companies with an international investor base experience the same, as do the government debt agencies,” he said.
“To date, these discussions have not led to any obvious change in investor appetite for Australian bonds or equity…There is a risk we will see more of these divestment decisions sooner rather than later,” he added.
Meanwhile, in the Climate Changed 2021 & Beyond report the RBNZ outlines its strategy to tackle climate change. The central bank aims to measure and manage its operational emissions, including its balance sheet; work directly with its regulated entities on climate-related risk management, including stress testing and supervisory frameworks; and leading the Council of Financial Regulators’ climate work streams.
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