MUMBAI: With the increasing risks of green-washing in the financial sector space, Reserve Bank governor Sanjay Malhotra has called for a cohesive co-ordination and harmonisation in approach to green financing saying financial institutions must develop a common pool of bankable projects and share their knowledge so as to better appraise risks in financing green projects.
Addressing a seminar on climate change risks and finance organised by Reserve Bank on Thursday in New Delhi, the governor said, one of the oft-cited constraints to adequate flow of climate related finance has been the lack of bankable projects. Capacity and expertise constraints limit the ability to appraise and thus finance climate change mitigation. It also enhances the risk of funding such projects.
“Therefore, creating a common pool of bankable projects will have multi-fold benefits for the entire ecosystem, and financial institutions with experience of such projects can contribute to the pool for the benefit of others, while also benefiting from such information shared by other regulated entities,” Malhotra said.
“This will help share knowledge for benefit of all. There is a need for collaboration in this emerging and evolving area. I urge the regulated entities to seriously consider setting up such a pool through an appropriate institutional arrangement,” he added.
Stating that the Reserve Bank is mindful of its role in addressing and mitigating risks to the financial system from climate change, he said one important aspect of green financing is the higher credit risks due to borrowers’ use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness. Therefore lenders need to develop suitable capacity and technical know-how to better appraise risks in financing projects which use such green technologies.
Noting that though climate related financial risk modelling is very important and data intensive, he said there is limited data available for measuring financial impact of climate change. Moreover, there is lack of benchmark sectoral transition pathways and country-specific carbon emission database. These constraints limit our ability to make a comprehensive assessment of climate change risks.
These limitations also constrain comparison of financial impact, as each regulated entity may use its own assumptions and models to process climate related data. To address such constraints, we RBI last October announced the creation of a repository called the Reserve Bank–Climate Risk Information System (RB-CRIS), to help bridge data gaps by providing standardised datasets such as 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.
“Work on the repository is underway and we expect to launch it later this year,” Malhotra said.
The Reserve Bank has also already issued draft guidelines on disclosure framework on climate related financial risks in February 2024, he said, adding is the Bank is in the process of finalising the guidelines apart from issuing a guidance note on climate scenario analysis and stress testing.
Calling for better coordination and cooperation between providers of technology and finance in a smoother transition towards a low-carbon economy, he said there is also a need to build innovative solutions and capabilities in these areas. Towards this, he said Reserve Bank has been encouraging and facilitating innovations through its regulatory sandbox and hackathon initiatives in the fintech space.
To further this, “we propose to set up a dedicated “on-tap” cohort on climate change risks and sustainable finance under RBI’s regulatory sandbox initiative. We are also planning to conduct a special ‘greenathon’ on climate change and related aspects,” Malhotra said.