RBI begins to address climate risk

August 4, 2022|Written by |Reserve Bank of India

The Reserve Bank of India (RBI) has released a discussion paper outlining its approach to managing climate and other environment-related risks. Currently the subject of a public consultation, the paper is the first major climate-related policy document published by the central bank.

Following an overview of the climate risks facing Indian financial institutions, the paper offers guidance largely aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures. Governance of climate risk management should be at board level, it advises, and should include development and implementation of a strategy to embed climate and environment considerations into the organisation.

Banks and other regulated financial institutions are asked to develop policies and procedures to identify, assess, monitor and mitigate climate and environmental risks, and to issue “timely and regular” reports on their climate-related risk exposures. The use of forward-looking tools such as stress testing and climate scenario analysis is also encouraged.

The RBI  has been slow to engage with climate change compared with its international peers. While the renewable energy sector was included in the RBI’s priority sector lending scheme in 2015, there has been little additional policy development since then.

India currently ranks 10th on the Green Central Banking Scorecard, rising one place since the previous edition as a result of the RBI joining the Network for Greening the Financial System (NGFS).

Along with other central banks, the RBI “broadly” supported the NGFS Glasgow Declaration released at Cop26 and committed to integrating climate-related risks into its financial stability monitoring.

A recent report on the RBI’s response to the climate crisis found that Indian fossil fuel extraction and other high-carbon sectors account for approximately 40% of bank lending to large corporations, representing a major transition risk to India’s financial system.

However, survey results published alongside the discussion document show that just a handful of Indian banks have attempted to quantify their climate risk exposure and only a third have assigned board-level responsibility for climate initiatives.

India has experienced a rise in average and extreme temperatures since the middle of the 20th Century. It has also seen an increase in the frequency and intensity of both droughts and severe cyclones, according to a 2020 national climate change assessment by the Ministry of Earth Sciences. Yet it continues to expand its use of coal for electricity generation, with coal capacity expected to grow by 17.5% over the next five years.

The consultation on the climate-risk discussion paper ends on 30 September.

This page was last updated August 4, 2022

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