India's central bank Reserve Bank of India (RBI) will contribute to the global efforts to mitigate the risks associated with climate change and ensure that the Indian financial system remains resilient.
RBI governor Sanjay Malhotra has said that climate related changes are perceptible, clear, and visible. They are intensifying and threatening ecosystems, livelihoods, and economies. It is our individual and collective responsibility, to work together effectively.
Mr Malhotra was addressing a policy seminar on climate change risks and finance organised by the bank recently. He said there are two dimensions to climate change-related risks that regulators, policymakers and practitioners have to be aware of — the first is facilitative involving capacity building, development of the ecosystem and financing of green and sustainable transition; and the second is the prudential aspect, which is related to risk management.
He said, “All the major types of financial risks - be it credit, market, or operational risk - are influenced by climate change. These risks include losses from credit portfolio due to extreme climate events or natural disasters (physical risks) and loss in value of collaterals due to stranded assets (transition risks); losses from investments; and operational losses.
“Although climate change impacts almost all economic sectors, the extent and nature of these risks vary by sector, industry, geography, and institution. The mitigation of climate change risks, therefore, rests – firstly, on realistic and comprehensive assessment of the frequency and severity of climate risks and secondly, estimating their financial impact, which is no easy task.”
He said there is a need to build innovative solutions and capabilities. The Reserve Bank has been encouraging and facilitating innovations through its regulatory sandbox and hackathon initiatives in the Fintech space.
Mr Malhotra said the bank proposes to set up a dedicated “on Tap” cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative. We are also planning to conduct a special “Greenathon” on climate change and related aspects.
He said there is a need to adopt a holistic approach towards mitigation of climate change risks considering the country specific requirements and circumstances. We will collaborate and coordinate with the government and other regulators to ensure that there is harmonisation and consistency in rules, regulations and our approach towards mitigating the impacts of climate change.