• The assessment and disclosure of climate risk is a window of opportunity for financial institutions to innovate financial solutions to support the green transition.
• It is now widely accepted that financial stress produced by climate risk affects the survival and health of individual lending institutions or even a country’s financial systemic stability.
• Recently released report by RBI titled ‘Report of the Survey on Climate Risk and Sustainable Finance’, is indicative of the steps being taken by various institutions to respond to this evolving reality.
• However, RBI’s initial efforts need to be supported by many more steps.

Climate finance

• It refers to local, national, or transnational financing—drawn from public, private and alternative sources of financing
• It seeks to support mitigation and adaptation actions that will address climate change.
• it is needed for mitigation because large-scale investments are required to significantly reduce emissions.
• It is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.
• It recognizes that the contribution of countries to climate change and their capacity to prevent it and cope with its consequences vary enormously.
• So the developed countries should also continue to take the lead in mobilizing climate finance through a variety of actions like including supporting country-driven strategies and taking into account the needs and priorities of developing country Parties.
• Financial mechanisms for climate finance under United Nations Framework Convention on Climate Change (UNFCCC): Green Climate Fund (GCF), Special Climate Change Fund (SCCF), Least Developed Countries Fund (LDCF), and Adaptation Fund

Target for climate finance

• UNFCCC COP15 (2009): Developed country parties, to achieve meaningful mitigation actions and transparency on implementation, jointly set a target of USD 100 billion a year by 2020 to address the needs of developing countries.
• The climate finance goal was then formally recognized by the UNFCCC Conference of the Parties at COP16.
• At COP21 in Paris, Parties extended the $100 billion goals through 2025.
• After COP26 there was a consensus that developed nations will double their collective provision of adaptation finance from 2019 levels by 2025.

Areas to be covered by RBI

End-use guidance for sustainable finance for regulated entities (REs):

• Provide more guidance on end use of sustainable finance by regulated entities, especially regarding which end uses would qualify for sustainable financing as well as an approach to monitoring end use.
• Securities and Exchange Board (SEBI)of India’s green debt securities framework’s list of end uses is one step in this direction.
• This is a starting point for the RBI to develop its own regulation keeping in mind the instrument level nuances between bonds and banking products.
• it also limits the possibilities of window-dressing or greenwashing.
• Greenwashing is the practice in which firms and governments mark all kinds of activities as climate-friendly, as something that would lead to emissions reduction, or avoidance of emissions.

Separate the Definition of climate risk as a separate risk class

• To create a separate formal definition of climate risk for the finance sector — the sources of climate risks could be physical, transition, liability, etc.
• Stipulate basic common disclosures related to this risk class in the organization’s annual reports/periodic filings.
• Encouraging REs to adopt the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines for improving REs acceptability and access to foreign funds/markets where TCFD is almost universally accepted as a disclosure norm.

Capacity building

• Preparing adequate number of well-trained professionals for RBI’s REs in the rapidly evolving areas of climate risk and sustainable finance.
• Indian Institute of Banking and Finance (IIBF) needs to prepare and provide regular trainings and technical skills upgradation courses for REs staff who will be part of the departments responsible for climate risk assessment and/or involved in sustainable finance initiatives.

Joint steering of RBI & SEBI for looking on climate risk

• A joint steering committee from the RBI, SEBI and the Insurance Regulatory and Development Authority (IRDA) for looking at climate risk issues together.
• A joint policy response for climate risk measurement and mitigation given the interdependent nature of financial institutions and markets.

A centralized public database

• A centralized public database pertaining to climate vulnerabilities such as inundation in flood-prone areas, heat stress, etc.

Business Responsibility and Sustainability Report (BRSR)

• BRSR is a reporting requirement by SEBI for ESG (Environment, Social and Governance) parameters for the top 1,000 listed Indian companies by market capitalization as well as ESG ratings.
• it covers measurable parameters of climate impact such as emissions, generation of pollutants, etc.
• By using this information, the REs should be conducting climate risk stress testing and simulations on their loan books at a total portfolio level.

Special Empowered Task Force

• The RBI could create Special Empowered Task Force to study the various sustainable finance instruments issued.
• By using this task force, it can create a half-yearly or annual reports/compendium detailing observations, trends of impact assessment, etc.
• It could provide valuable guidance to financial institutions, both domestic and global.

India has announced a net zero target for 2070 but the roadmaps and concrete action plans for achieving the targets are missing. RBI should think about the assessment and disclosure of climate risk to innovate financial solutions and provide support the green transition of industry and society by creating a centralized public database pertaining to climate vulnerabilities. It will help the government to improve its policy towards climate finance.