MUMBAI: Warning of the increasing intensity and severity of climate risks, Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has called for a regulatory response to mitigate these challenges, emphasising their impact on price and financial stability.
Speaking at an international conference on "Mitigating Climate Change Risks and Fostering a Robust Ecosystem for Sustainable Finance", organised by the Institute of South Asian Studies at the National University of Singapore in New Delhi last week, Rao said, “While there is some debate on whether or not climate change is part of a mandate for a central bank, the fact that it has a bearing on both price and financial stability means that there is a need for a regulatory response on risks arising from climate change.”
He elaborated that the financial system and the broader economy are vulnerable to climate-related risks, depending on the extent of exposure and the measures adopted to mitigate these challenges. “The dilemmas and the challenges being faced by the regulators is to not only put in place an enabling ecosystem from a prudential perspective but also to act as an enabler and facilitator for orderly and sustainable development of the financial system and economy.”
Rao stressed the importance of inter-regulatory coordination to address the systemic risks posed by climate change. “Given the significant inter-sectoral dependencies, the mitigation of climate change risks not only requires individual sectoral response from regulators, but also inter-regulatory coordination,” he said.
He warned of the financial stability risks stemming from the interplay between climate-specific vulnerabilities and the real economy. “Since the interplay of climate-specific vulnerabilities with the real economy and the vulnerabilities in the financial sector can lead to financial stability risks, it is essential to build capabilities to ensure correct assessment of these risks and put in place suitable adaptation and mitigation measures. Transparency and capacity building are going to be the key differentiators and we need to collectively move in this direction.”
Rao also pointed out the grave implications of climate change on the global economy, projecting an annual GDP loss of 3–10% by 2100. He said, “There is no doubt that climate change is going to be a major risk for the financial system, economy, and society at large, with risks of severe catastrophic events putting at stake our very survival. The financial system not only needs to brace up and equip itself to the present and future impacts arising from climate change, but should also play a catalytic role by overcoming the consequent challenges that arise.”
He identified inadequate financing for sustainable technologies and infrastructure as the biggest challenge for emerging markets and developing economies.
“On the many difficulties being faced in getting adequate green financing, there is an urgent need to develop an ecosystem to mainstream adaptation finance and to rise above the typical corporate social responsibility-linked funding and public investments,” he said.
Rao called for innovative measures to derisk sustainable projects and promote research and development in green technologies. “There is a need to collectively think as to how sustainable projects involving new and evolving technologies can be derisked without subjecting the financial system to any spill-over risks. There is also a need for a more intense focus on promoting R&D in the area of sustainable technologies. Since many of the green projects are not bankable, there is a need to create a green and sustainable asset repository that will showcase the use cases of such technologies for financial institutions.”
The RBI has undertaken several initiatives to address climate risks, including establishing a dedicated internal group to assess climate-related risks and foster sustainable finance.
The central bank has also released surveys and frameworks on climate risks and sustainable finance and recently launched the Reserve Bank–Climate Risk Information System (RB-CRIS). This system, operational since October 2024, features a public web-based directory of data sources and a data portal comprising standardised datasets.
Rao concluded by underlining the necessity of a collaborative effort to tackle climate challenges: “Transparency and capacity building are essential as we move collectively towards addressing these risks.”