Money & Banking

Climate risks can impact the financial sector: RBI Deputy Governor

Our Bureau Mumbai | Updated on September 20, 2021

It is vital to make the financial system more resilient in the face of the potential costs of extreme weather events, Says M Rajeshwar Rao

Both climate change and the transition to a carbon-neutral economy have the potential to affect the economy and by extension, general welfare of the people, according to M Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI).

Hence, there is a clear benefit to acting early and ensuring an orderly transition.

“While transition costs may be higher in the short term, they are likely to trend much lower in the long run when compared to the costs of unrestrained climate deterioration.

“It is thus, vital to make the financial system more resilient in the face of the potential costs of extreme weather events,” Rao said at a recent CAFRAL Virtual Conference on Green and Sustainable Finance.

Climate risks can impact the financial sector through two broad channels -- physical and transition risks, he added.

Physical risks mean economic costs and financial losses resulting from the increasing severity and frequency of extreme weather events and long-term climate change.

Transition risks arise in the process of adjustment towards a low-carbon economy.

“It is, therefore, important to understand these risk drivers which are likely to affect the financial firms,” the Deputy Governor said.

Rao observed that the challenge before the RBI is to mainstream green finance and think of ways to incorporate the environmental impact into commercial lending decisions while simultaneously balancing the needs of credit expansion, economic growth and social development.

Recently, RBI set up a Sustainable Finance Group (SFG) within the Department of Regulation to spearhead its efforts and regulatory initiatives in the areas of sustainable finance and climate risk.

The Group will be advising regulated entities to have a strategy to address climate change risks and appropriate governance structures to effectively manage them from a micro-prudential perspective and exploring forward looking tools like climate scenario analysis and stress testing for assessing climate-related risks, among others.

Published on September 20, 2021

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