Climate Change: Need For Adaptation By Regulators And Regulated Entities

Since adaptation finance is yet to be taken to the expected levels, central banks have to provide an ecosystem for enhanced adaptation finance .There is a greater need for global cooperation from all stakeholders

Climate change poses a major risk to both economy and the financial sector. The climate related disasters that we are witnessing presently will have major repercussions on economy besides posing financial and transition risks.

The severe weather linked events can have devastating consequences for communities and infrastructure, which, in course of time, will need the government to undertake rehabilitation and rebuilding exercises that can burden the state exchequer. In the current situation when public debt is quite high, many countries will find it difficult to provide funds for reconstruction purposes.

Any such additional financial burden will have an adverse impact on real economy and the country will be subject to low growth that will in effect have a bearing on GDP.

It is projected that climate change could lead to a potential loss of up 26.5 per cent of global GDP in a severe scenario whereas India could have a potential 25 per cent GDP loss by 2070.

It is therefore imperative that all countries focus more on adaptation measures, which is estimated to cost around $280 to $500 billion by 2050. As things stand, finances needed for adaptation are far less. According to a November document released by Network for Greening the Financial System (NGFS), highlights the relevance of climate adaptation and the role central Banks and supervisors can play to contain the effects. It calls for integrating adaptation into risk management, promoting adaptation finance and bridging insurance protection gaps, both for developed economies and emerging developing economies.

This year the NGFS annual plenary meeting was organised by the Reserve Bank of India (RBI) in New Delhi on March 11 and 12.

According to an official release, the two-day event helped the member central banks to share their experiences as regards handling climate change related challenges and the corresponding financial risks.

According to Sabine Mauderer, Chair of the NGFS and First Deputy Governor of Deutsche Bundesbank "Our members reflect the impact of climate change when conducting monetary policy and tackling financial stability. Our analysis clearly demonstrates the impacts of climate change on the global economy and the financial system. Unfortunately, as these impacts are likely to become even more tangible in the future, central banks and supervisors will need to pay even greater attention to climate related financial risks."

This statement emphasises the fact that along with the state taking measures to transit to green economy with their committed national determined contribution plans to switch to alternative green energy sources, even central banks have to take cognizance of the financial risk related to climate change in their monetary policy. In keeping with that, they have to provide measures to regulated entities to assess the credit, market and operational risks that are influenced by climate change and provide a framework for not only assessing and taking mitigation measures to reduce the impact of such risks but also give disclosures on a base and enhanced basis.

There is also a need to build awareness and capacity building in terms of skills and knowledge apart from providing the necessary tools and metrics for better measurement and disclosure of adaptation. There is a greater urgency on central banks to enable policy, supervisory and regulatory frameworks towards adaptation. These should be embedded in risk management for financial and non-financial institutions. Since adaptation finance is yet to be taken to the expected levels, central banks have to provide an ecosystem for enhanced adaptation finance .There is a greater need for global cooperation from all stakeholders to collaborate at the international level with actions focussed on local consideration.

Sanjay Malhotra, Governor of RBI in his address at the recent policy seminar on climate change risks and finance, stressed upon the two dimensions to climate change related risks: capacity building and development of the eco system and financing of green and sustainable transition; the prudential aspect which is related to risk management.

The various initiatives taken by RBI so far in relation to these areas were detailed by him. He also hinted at the future initiatives towards the ecosystem for adaptation finance and availability of tools and metrics for data -Climate Risk Information System (RB-CRIS).

These datasets include hazard data, vulnerability data and exposure data related to physical risk assessment, sectoral transition pathways and carbon emission intensity database related to transition risk assessment.

Another initiative RBI is taking by way of encouraging and facilitating innovations is through its regulatory sandbox and hackathon initiative in Fintech space as technology and finance have a critical role in transition towards a low-carbon economy.

The RBI Governor also stressed the need for honing knowledge and expertise and making available a common pool for financing bankable green projects as there is a lack of such bankable green projects. There is also a need for expertise on financing such projects.

While RBI has taken appreciable measures in this regard, there is a need to take expedited measures to prepare the regulated entities to prepare adequately for meeting the financial and transition risks.

Sanjay Malhotra said, "We will continue to work in a steadfast manner to realise our vision of a financial system that will not only withstand future climate shocks but also actively contribute to India's journey towards a sustainable and resilient future"

This is timely and effective proposition. We can expect both the regulator and regulated entities to work towards this very objective as a collective effort.

(The author is former Chairman & Managing Director of Indian Overseas Bank)