This would help these entities innovate, make strategic decisions, mobilise capital and build effective transition plans for achieving sustainability targets, he said.
The Reserve Bank of India will soon issue guidance to banks for the identification of risks to their credit portfolio from climate-related issues, deputy governor Rajeshwar Rao said.
“We need time consistent, transparent, standardised and forward-looking disclosures for the identification of vulnerabilities,” Rao said at a recent panel discussion on implications of climate-related issues for central banking.
The discussion was organised by the International Monetary Fund and the Centre for Social and Economic Forum.
“At a firm-level, the scenario analysis and stress testing will help frame the strategies to manage the risks for individual entities,” he said, adding that the RBI will be issuing guidance in this regard.
Rao said a large-scale capacity-building plan is necessary to help central banks, financial firms and economic players to understand, assess and plan for the climate issues and related financial risks.
This would help these entities innovate, make strategic decisions, mobilise capital and build effective transition plans for achieving sustainability targets, he said.
“One very important aspect of this capacity building is going to be the hand-holding of the smaller firms and MSMEs to make it easier for them to navigate the transition,” the deputy governor stressed.
Rao said from a banker’s perspective, climate risks can impact the macroeconomic outcomes from two channels–physical and transition risks.
While physical risks refer to direct outcomes of climatic events like wildfires, storms and floods, the transition risks refer to the risks arising from the process of adjustment towards reducing the emission intensity of the economy, he said.
If not managed properly, the transition risks could also lead to a sudden fall in asset prices of the carbon-intensive assets, which makes them unattractive to hold, Rao said.
Hence, various central banks are beginning to recognise and evaluate risks which climate change may pose to monetary policy, financial stability and regulated entities, Rao added.
He, however, said financing the new green ventures alone will not be enough.
“We would need credible transition plans for existing emitting firms without compromising their output or growth,” Rao stressed.
In line with India’s target of achieving net zero carbon emissions by 2070, the RBI has been taking various policy measures to promote and support green finance initiatives.
Finance to renewable energy projects have been included as part of priority sector lending portfolio of banks.
The RBI supported the government in issuing sovereign green bonds and proceeds from these are intended to be deployed in public sector projects, which will help reduce the carbon intensity of the economy.
The central bank also issued instructions for the acceptance of green deposits. A disclosure framework on “climate-related financial risks” and guidance on climate “scenario analysis and stress testing” is also under works.
Source:financialexpress.com