Climate change affects financial system, need regulatory checks: RBI Dy Guv

Since climate change has a bearing on both price and financial stability, there is a need for a regulatory response to mitigate risks arising out of it, said M Rajeshwar Rao, deputy governor, Reserve Bank of India (RBI).

 

The impact on the financial system and economy arising from climate change is dependent on the extent of their exposures to these risks and mitigation measures that are in place, Rao said while speaking at the International Conference, organised by the Institute of South Asian Studies (ISAS) on November 29. The RBI released the speech on December 4.

 

According to Rao, the dilemma and challenge faced by the regulators is to not only put in place an enabling ecosystem from prudential perspective, but also act as an enabler and facilitator for orderly and sustainable development of the financial system and economy. Hence, the mitigation of climate change risks not only requires individual sectoral response from regulators, but also inter-regulatory coordination, he said.

 

 

Rao said the RBI has been proactive to mitigate the climate change risks that may impact the financial system. The central bank has set up a dedicated group within banks to assess climate change risks and foster a robust ecosystem for sustainable finance. Additionally, the RBI has conducted a survey on climate risk and sustainable finance, covering 34 scheduled commercial banks. Following this, the RBI released a discussion paper on climate risk and sustainable finance, along with a framework on green deposits.

 

“RBI has been actively engaging with various stakeholders in the financial sector for integration of climate change risks in traditional risk management framework,” Rao said, adding that the central bank is engaged in climate scenario analysis to identify vulnerabilities in their balance sheets; taking steps to ensure adequate flow of credit for mitigation purposes; and addressing gaps in capabilities for measuring and managing climate-related financial risks.

 

Further, RBI has issued a draft disclosure framework for climate related financial risk for public consultation. Based on the feedback received, the final guidelines are likely to be released shortly, Rao said, adding that the intent of the disclosure framework is to prepare the regulated entities to identify and build competencies to mitigate climate change risks and not to restrict lending to any particular sector or industry.

 

Rao highlighted that we have still not reached a stage where we can comprehensively assess the risks arising from climate change. He emphasised that currently there is no set practice among financial institutions of labelling loan assets which have gone bad on the basis of any climate risk event, thus limiting the availability of realistic loan loss data for integration of climate-related risks into traditional risk management models to estimate probability of default.

 

“Consequentially, various approximation methods/data sets are being used at this point to arrive at loan loss data and measure expected future losses,” he said.

 

As far as sustainable finance is concerned, Rao said, while bankable projects invariably find credit, there are issues with partially bankable and non-bankable projects, which generally gets associated with adaptation.

 

“There is an urgent need to develop an ecosystem to mainstream adaptation finance and to rise above the typical corporate social responsibility-linked funding and public investments,” Rao said.

 

Additionally, he said, there is a pressing need to establish a green and sustainable asset repository which will showcase the use cases of such technologies for the financial institutions. “Given the quantum of funding required for sustainable finance, besides, other sectoral domestic investment requirements, there is a pressing need to leverage available international climate finance funds for climate mitigation and adaptation projects,” Rao said.