RBI deputy governor stresses need for supervisory frameworks to include climate risks

The deputy governor of the Reserve Bank of India (RBI) has emphasised the importance of incorporating climate-related risks into central banks’ supervisory frameworks.

Speaking at a panel discussion on the climate implications for central banking,  Rajeshwar Rao stressed that financing green ventures alone would not be sufficient and credible transition plans for existing firms are necessary without compromising their output or growth.

To achieve this goal, he said that “central banks can incorporate climate-related risks into their supervisory frameworks and can contribute to the development of frameworks and standards for green finance. These frameworks can help promote transparency, standardisation, and integrity in the green finance market.”

A disclosure framework on climate-related financial risks is now underway, as well as guidance on climate scenario analysis and stress testing, said Rao. Pointing to the recent currency and finance report, Rao highlighted the RBI’s ongoing policy measures to support green finance initiatives. As an example, he mentioned that finance for renewable energy projects has been included in banks’ portfolios.

He also discussed the successful issuance of sovereign green bonds (SGrBs) earlier this year, with the proceeds going to public sector projects aiming to reduce the economy’s carbon intensity. Additionally, the issuance of SGrBs would facilitate price discovery for other financial instruments and stimulate development of a green financing ecosystem in the country.

Rao noted how a global understanding of the systemic impact of climate change on the economy and financial system is evolving. He stressed the need for large-scale capacity building efforts to equip central banks, financial firms and players in the real economy to understand, assess and plan for climate-related financial risks.

Stress testing has been a hot topic of late as new research has shown testing underestimates potential financial sector losses.

The deputy governor also expressed concern over the unsatisfactory implementation of various climate finance commitments from advanced economies. He emphasised the need to reverse the trend, as only US$83.3bn out of the pledged $100bn was provided in 2020, representing a mere 4% increase from 2019.

The comments somewhat chime with the disappointment that followed Emmanuel Macron’s climate finance summit in June, where there was limited progress on restructuring debt for low-income countries to help them finance the net-zero transition.