The Reserve Bank of India (RBI) is close to finalizing climate risk disclosure norms for regulated entities and preparing a guidance note for lenders to conduct climate scenario analysis and stress testing, Governor Sanjay Malhotra announced on Thursday.
Key Announcements
- Finalization of Disclosure Norms: RBI is working on a framework to ensure that regulated entities outline their climate risk management plans.
- Guidance on Climate Stress Testing: A dedicated guidance note will help financial institutions analyze climate-related risks through scenario-based stress testing.
- Common Pool of Bankable Projects:
- To boost climate finance, entities will be encouraged to create a shared pool of viable green projects.
- Financial institutions with experience in climate-related financing can contribute to and benefit from shared project data.
Climate Change Risks and Financial Sector Coordination
- The impact of climate change risks extends beyond finance to corporates, MSMEs, and agriculture, requiring a cohesive and harmonized approach.
- Collaboration among financial sector regulators, regulated entities, and government agencies is crucial for effective risk mitigation.
RBI’s Commitment to Green and Sustainable Finance
RBI’s Role as a Facilitator
- Acts as a facilitator for capacity building and a conducive regulatory framework to promote green finance.
- Issued the Framework on Acceptance of Green Deposits to encourage banks to finance green projects.
- Integrating small renewable energy projects into priority sector lending to boost green financing.
Commitment to Climate Risk Management
- Adopting a constructive and consultative approach to mitigate financial risks from climate change.
- Collaboration with the government and regulators to ensure harmonization and consistency in climate policies.
Vision for a Resilient Financial System
- Building financial resilience against climate shocks.
- Enabling the financial system to actively contribute to India’s sustainability goals.
RBI’s Short-Term Climate Action Plan
- Assess Climate Risks: Realistically estimate climate-related risks at both individual institutional and financial system levels.
- Implement Stress Testing: Use bottom-up and top-down approaches for risk assessments.
- Encourage Green Financing:
- Strengthen technical expertise for financing green technology projects.
- Promote innovation in sustainable finance solutions.
New Initiatives Underway
- Regulatory Sandbox “On Tap” Cohort: A dedicated initiative focused on climate risk and sustainable finance.
- Special “Greenathon” Event: Planned to encourage innovation in climate finance and sustainability.
- Final Climate Risk Disclosure Guidelines:
- Following public consultations on the draft framework (February 2024), RBI is now incorporating feedback for final guidelines.
- Regulated entities must detail governance, risk assessment, mitigation, and monitoring processes for climate-related financial risks.
The Road Ahead
With these new regulatory frameworks, RBI aims to:
- Strengthen climate risk assessment capabilities within the financial sector.
- Foster more transparent and effective climate finance mechanisms.
- Support India’s transition to a low-carbon economy through sustainable investment practices.
These initiatives mark a significant step in integrating climate risk considerations into India’s financial system, ensuring both stability and sustainability in the long term.
