RBI’s recent paper on climate risks is an important and timely measure towards achieving awareness regarding climate risk and its systemic implications amongst its regulated entities (REs).
Despite the report showing steps taken by various institutions to respond to this challenge, there are other specific areas which the RBI needs to consider:
- End-use guidance for sustainable finance for REs: REs need to be guided on end use of sustainable finance.
- SEBI’s green debt securities framework’s list of end uses is one such step in this direction.
- Developing own regulation would limit the possibilities of window-dressing or green washing.
- Climate risk as separate class: Assessment of loans is usually done in terms of credit, market, liquidity and operational risks. The RBI could stipulate a separate formal definition of climate risk for the finance sector.
- RBI could also stipulate organizations to disclose this risk class in their annual reports/periodic filings.
- Capacity building: RBI needs to prepare adequate number of well-trained professionals to work in REs in the rapidly evolving areas of climate risk and sustainable finance.
- Training body such as Indian Institute of Banking and Finance (IIBF) may be engaged to prepare and provide regular trainings and skills upgradation courses for REs staff working in climate risk/ sustainable finance department.
To ensure RBI’s climate risk policy is based on empirical data and cutting edge scientific research, following steps can be taken:
- A joint steering committee: It can include members from RBI, SEBI and Insurance Regulatory and Development Authority (IRDA).
- They can handle climate risk issues together and come out with a joint policy response for climate risk measurement and mitigation.
- They can engage with the domestic and international climate scientist community to build on their available data.
- Centralized public database: This can be set up to record climate vulnerabilities such as inundation in flood-prone areas, heat stress, etc.
- Special Empowered Task Force: RBI can form such a force to study various sustainable finance instruments issued.
- Half yearly or annual reports/compendium brought out by the task force, detailing observations, trends of impact assessment, etc, can provide valuable guidance to financial institutions.
- The assessment and disclosure of climate finance provides opportunity for India’s financial system to innovate financial solutions and products to support the green transition of industry and society in an impactful way.
- Financial stress emerging from climate risk not just affects the survival and health of individual lending institutions or even a country’s financial systemic stability, but functioning of the society as whole.