Climate risk discussion paper by the Reserve Bank of India

Subject : Economy

RBI’s paper on climate action has suggestions worthy of adoption.

About the discussion paper:

The paper highlights gaps in the way climate change as a material risk is treated by India’s banks. It diligently elucidates:

Physical climate impact risks.
- It refers to the economic costs and financial losses resulting from the increasing frequency and severity of extreme climate change-related weather events such as acute physical risks and chronic physical risks.
Transition loss risks
- The process of transition to reducing carbon emissions may have a significant impact on the economy. It includes:
  - Cost due to changes in climate-related policies and regulations.
  - Investment portfolios or reduction in cash flow due to emergence of newer technologies.
  - Shifting sentiments and behaviour of customers.
- The consultation paper offers:
- Broad guidance,
- Illustrative examples and good practices for regulated entities around governance,
- Disclosures strategy, processes and the risk management structure to address climate risks, with valuable insights for consideration of boards.
- It provides more emphasis on the numerous financing opportunities.
  - foreign capital through sustainability-linked loans and bonds.

Initiatives by the RBI in climate change:

In May 2021, it set up a Sustainable Finance Group within its Department of Regulation
- It aims to coordinate with other national and international agencies on issues relating to climate change.
The Reserve Bank released on its website the results of a Survey on Climate Risk and Sustainable Finance undertaken in January 2022.
- The Sustainable Finance Group (SFG) carried out a survey in January 2022 to assess the status of climate risk and sustainable finance in leading scheduled commercial banks.
- The survey covered 12 public sector banks, 16 private sector banks and 6 foreign banks in India.
- It provides useful insights, and the feedback from this exercise will help in shaping the regulatory and supervisory approach of the RBI to climate risk and sustainable finance.
In a bulletin issued in March 2022, the RBI analysed the impact of the green energy transition on fossil fuel dependent industries.
The recently released climate risk discussion paper by the Reserve Bank of India (RBI), to encourage the country’s financial sector to prioritize green-transition financing and ensure long term systemic stability by addressing the growing threat of climate challenges, is most welcome.

Network for Greening the Financial System

It is a group of central banks and supervisors willing to share best practices and contribute to the development of environment and climate risk management in the financial sector.
It was created at the Paris One Planet Summit in December 2017 and its secretariat is hosted by the Banque de France.
It also seeks to mobilise mainstream finance to support the transition towards a sustainable economy.