Collateral damage: how the war on ‘woke banking’ could backfire on New Zealand

It would be hard to think of an industry less obviously “woke” than banking, but that’s how coalition partner NZ First has characterised certain practices within the finance sector.

The party’s tortuously titled Financial Markets (Conduct of Institutions) Amendment (Duty to Provide) Amendment Bill – dubbed the “woke banking” bill – takes aim at efforts to build sustainability concepts into investment practices.

Known as the “environmental, social and governance (ESG) framework”, such policies are designed to guide how a bank manages risks and opportunities beyond basic profit and loss.

NZ First’s bill seeks to ensure no New Zealand business can be denied banking services unless the decision is grounded in law. Its proponents argue it will prevent ESG standards from perpetuating “woke ideology” in the banking sector, driven by what they describe as “unelected, globalist, climate radicals”.

Prime Minister Christopher Luxon has supported the bill’s aims, recently calling it “utterly unacceptable” that petrol stations and mines were being denied banking services due to banks’ commitment to climate change goals.

Coalition partner ACT similarly called for the end of “banking wokery”. And last week the Finance and Expenditure Committee announced an extension of its inquiry into banking competition to include, among other issues, the “debanking of legitimate sectors”.

Risk management isn’t ‘woke’

Much of this is largely politically performative, however. A broader international trend has for, some time now, seen financial institutions increasingly aligning their lending practices with ESG criteria.

In Europe, for example, data from the European Banking Authority show banks have halved their exposures to mining firms since 2020, reflecting that global shift towards sustainability and risk management.

This is about more than “woke” agendas and is unlikely to reverse, given current global efforts to decarbonise. Encouraging or forcing banks to invest in carbon-emitting industries introduces financial risk. If those assets lose value, it constitutes irresponsible lending.

While the current US administration may be embracing fossil fuel industries, consumer and investor demand for sustainable policies is still strong. When banks such as the BNZ prepare for an orderly exit from declining industries, they are simply engaging in risk management.

Banks also manage regulatory risk. While the current government may enact the bill and force banks to invest in carbon-emitting industries, a future government could reverse that policy. This undermines long-term investment strategies.

Regulatory uncertainty

There is also a danger New Zealand is perceived internationally as not being serious about business and investment. In particular, the prime minister’s pressure on bank lending policies cuts across his stated commitment to the Paris Agreement on climate change.

The resulting regulatory uncertainty is counterproductive: it potentially deters international investors at a time when the government aims to attract foreign investment.

Ultimately, if bank lending policies lead to poor outcomes, it is ordinary New Zealanders who will likely bear the costs through higher interest rates or even bank failures.

In its eagerness to boost lending, the government is also encroaching on the Reserve Bank’s territory by directing it to prioritise competition, including reviewing risk weightings and capital thresholds (designed to build buffers against failure) for new entrants to the market.

But history shows that before the 2007-2009 global financial crisis, similar bank-friendly initiatives – often labelled “principles-based” – led to bad debt accumulation and increased economic vulnerability.

Institutional failure

The shift towards what we might call populist banking policies is not confined to New Zealand. Globally, there is a declining political interest in financial stability and prudential regulation.

For example, agreement on the “Basel III” reforms – developed in response to the global financial crisis and aimed at strengthening the regulation, supervision and risk management of banks – will likely be delayed by the Trump administration.

This will have ripple effects in Europe, Britain and the rest of the world, signalling a softening of global capital requirements. As Erik Thedéen, chair of the Basel Committee on Banking Supervision, described this:

Shaving off a few basis points of capital will not unlock a wave of new lending, but it will weaken your resilience. More generally, being well capitalised is a competitive advantage for banks and their shareholders. It ensures they can continue to grow and invest in profitable projects across the financial cycle.

Politicians need to be very careful when interfering with bank supervision policies in general. They risk undermining the independence of crucial institutions, with real consequences.

Last year’s Nobel Prize for economics went to Daron Acemoglu, Simon Johnson and James A. Robinson for their “studies of how institutions are formed and affect prosperity”. Their warning is that institutional failure can lead to the failure of nations.

A resilient banking system

While New Zealand isn’t in such imminent danger, political leaders need to be aware that populist appeals to certain voter segments can lead to policies that undermine the banking system and economic growth, and disproportionately affect the most vulnerable.

As Stelios Haji-Ioannou, founder of low-cost airline EasyJet, once remarked: “if you think safety is expensive, try an accident”.

New Zealand needs to focus on policies that promote long-term financial stability, enhance productivity and sustainable economic growth. Globally, there needs to be a recommitment to prudential regulation to ensure the lessons of the global financial crisis are not forgotten.

Only by doing so can we build a resilient banking system that serves the interests of all, not just a privileged few.