The Reserve Bank of India (RBI) recently joined the Network for Greening the Financial System (NGFS), indicating a significant shift towards climate finance and environmental considerations. This move is expected to provide RBI with an opportunity to learn from and actively contribute to global efforts in tackling climate change.
The NGFS, a global network of central banks and supervisory authorities, was established at the Paris One Planet Summit in December 2017, aiming to promote financial system sustainability. Its primary goal is to scrutinize the implications of climate change on the financial system and to redirect financial flows to foster low-carbon economic growth. The NGFS secretariat operates out of the Banque de France. The association with NGFS allows RBI to partake in shaping and influencing international norms and standards around sustainable finance.
Understanding Climate Finance
Climate Finance refers to local, national, or transnational financing derived from public, private, and alternative sources. The funding aims to support actions that mitigate climate change effects and promote adaptation strategies.
Risks to Financial Stability due to Climate Change
Climate change presents severe risks to financial stability, primarily through two forms – physical risks and transition risks. Physical risks stem from extreme weather conditions and slow onset weather events, while transition risks arise from alterations in policy, legal and regulatory frameworks, consumer preferences, and technological advancements as the economy shifts towards low-carbon alternatives.
For instance, climate change projections foresee rising sea levels and subsequent storm surges, which could lead to the inundation of coastal land parcels. This scenario poses significant risks to real estate loans, mortgage-backed securities, firms’ profitability, and the finances of governments facing declining property tax revenues and increased remediation costs.
According to the World Economic Forum’s (WEF) Global Risks Report 2021, potential climate action failure and infectious diseases pose the highest risks in terms of impact and likelihood.
India’s Climate Change Concerns
A World Bank report estimates that by 2050, India’s Gross Domestic Product could lose as much as USD 1,178 billion due to climate change. With this in mind, the RBI has emphasized the importance of climate-related financial disclosures and private green finance as a necessary strategy to generate the substantial investments required to combat climate change.
Unfortunately, a study by the non-profit Shakti Foundation reveals that most Indian companies are lagging in the climate change disclosure space due to limited expertise, limited access to relevant tools and methodologies, and inadequate subject knowledge.
Related Climate-oriented Initiatives
The Task Force on Climate-related Financial Disclosures (TFCD) was established in 2015 by the Financial Stability Board (FSB). Its main objective is to provide consistent climate-related financial risk disclosures for use by companies, banks, and investors to inform stakeholders. Recently, New Zealand became the first country to legislate mandatory climate-related risks and opportunities disclosure by financial firms.
Shaping the Future of Climate Finance in India
The path ahead calls for a complete integration of climate-aligned structural transformation with economic recovery, which would necessitate a fundamental redirection in the finance system, primarily involving a massive increase in private finance.
The Indian government is urged to introduce guidelines and regulations to standardize and mandate climate-related disclosures in all financial statements. Doing so encourages private companies and financial institutions to manage their climate risk exposure, which could bolster the resilience of Indian companies while facilitating greater climate finance flows and minimizing ‘greenwashing’.
