RBI report bang on for making India greener, cleaner country

Risks related to climate change are now quite visible and India is also exposed to them to a considerable extent. All its stakeholders, including regulators/supervisors and financial institutions have to adopt a pro-active strategy to mitigate the possible implications of climate change on the economy and in preparing for the future. The RBI report explores a range of feasible policy options encompassing various domains

India has set itself a target to achieve net zero by 2070. With the updated National Determined Contribution (NDC), India now stands committed to reduce emissions intensity of its GDP by 45% by 2030 from the 2005 levels and achieve about 50% cumulative electric power installed capacity from non- fossil fuel based energy resources by then. India's intended NDC to UNFCCC on October 2, 2015, had comprised eight key targets- three of these being quantitative targets up to 2030. These include cumulative electric power installed capacity from non- fossil sources to reach 40%, reduce the emissions intensity of GDP by 33-35% compared to the 2005 levels and creation of additional carbon sink of 2.5-3 billion tonnes of C02 equivalent through additional forest and tree cover.

The government has developed a strong focus on flex-fuel engines as well as alternatives to fossil fuels, including electric propulsion, biofuel, hydrogen, natural gas and synthetic fuels. At COP26, India updated its NDCs, which represent the framework for its transition to cleaner energy for the period 2021-2030. It has committed to accommodate panchamrit, which includes raising the non-fossil fuel's energy capacity of the country to 500 Gigawatt by 2030, 50 per cent energy requirements from renewable sources and 45 per cent reduction of carbon intensity by 2030. India's Prime Minister Narendra Modi’s Mission LiFE (Lifestyle for the Environment) is a welcome decision and every individual can contribute to one's capacity. India has also initiated National Solar Alliance, a treaty-based international intergovernmental organization, through which it aims to mobilise over $ 1,000 billion of investment that is needed for the massive development of solar energy by 2030. The objective of the 2015 treaty with France is to scale up cost-effective solar energy through aggregation of demand for solar finance, technologies, innovation, research and development and capacity building. To take this forward, the National Green Hydrogen Mission took shape in January.

Rallying for the cause, the RBI is actively engaged in fortifying India’s climate defences through various policy initiatives given the opinion in some quarters that climate action is the domain of fiscal policy. The risks of climate change may affect food crops and lead to food shortage and decline in food production besides the possibility of inflation volatility.

There are two types of risks-physical and transition. They can affect the robustness of financial institutions and their ability to provide credit.

Four years after it was founded, RBI joined Network for Greening the Financial system (NGFS) comprising central banks and supervisors. This can strengthen the global response for meeting the Paris Agreement goals and also enhance the role of the financial system in managing risks from climate change and mobilizing green finance for environmentally sustainable development.

The three commitments highlighted by RBI include:

a. Exploring how climate scenario exercises can be used to identify vulnerabilities in RBI- supervised entities' balance sheets, business models and gaps in their capabilities for measuring and managing climate-related financial risks;

b. Integrating climate-related risks into financial stability monitoring;

c. Building awareness about climate-related risks among regulated financial institutions and spreading knowledge about methods to deal with them.

The RBI released a discussion paper on climate risk and sustainable finance with broad guidance to develop good practices last July. They covered appropriate governance, climate risk strategy and risk management structure. All regulated entities have been mandated to prepare themselves with board-approved sustainable and climate change, green finance and green assets policy besides identifying current risks like credit, market, liquidity, operational risks from lending to corporates and MSME, who are prone to climate risks without mitigating actions to reduce emissions. The discussion paper laid out guidance for voluntary initiatives by regulated entities on green finance, establishing green branches and green data centres, encouraging greater use of electronic means of communication instead of paper and renewable energy sources.

A January 2022 survey of 34 scheduled commercial banks on "Climate Risk and Sustainable Finance" by RBI revealed that some foreign, private and public sector banks are at different stages of considering physical, transition and liability factors to their risk management. Recent developments indicate efforts by all regulated entities and IBA has taken capacity building awareness and training program on ESG and Green Finance.

The RBI has made it clear that they intend to prepare a strategy based on global best practices on mitigating the adverse impacts of climate change. The strategy hovers around:

a. Overview of climate related risk and unique characteristics as applicable to REs;

b. Broad guidance for all REs to have appropriate governance, strategy to address climate change risks and risk management structure to effectively manage them from a micro-prudential perspective; c. Exploring how forward looking tools like stress testing and climate scenario analysis can be used to identify and assess vulnerabilities in Res;

d. Climate-risk related financial disclosure and reporting for REs.

Risks related to climate change are now quite visible and India is also exposed to them to a considerable extent. All its stakeholders, including regulators/supervisors and financial institutions have to adopt a pro-active strategy to mitigate the possible implications of climate change on the economy and in preparing for the future.

The RBI report explores a range of feasible policy options encompassing various domains such as fiscal policy, technology, international trade, regulatory and monetary policy, market-based and citizen-centric measures to achieve India's net Zero target.

In conclusion, climate change and risks associated with it are highly vulnerable and they call for accelerated efforts at all levels, in terms of reducing energy intensity of output as well improving the energy mix in favour of renewables, as reported by RBI. It also cautions that delayed climate policy actions could prove detrimental and costlier by way of larger output losses and higher inflation.

It is, therefore, imperative for financial institutions take up these risks on a priority basis and take policy decisions that are aimed at avoiding physical, transit and liability risks for their portfolio and avoid economic and financial risks to the Indian economy.

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