RBI mulls paper to equip banks to brace for climate change

In order to sensitise banks and other financial institutions to the risks of climate change, the central bank is going to issue a consultative paper. The paper will familiarise banks with international practices and enable adoption of a strategic approach to climate-related risks.

“The physical and transition risks either individually or together may be high for India under the ‘current policies’ scenario. A successful implementation of emission reduction for India carries inflationary risks, which will need to be managed through carefully crafted transition plans,” the central bank said in its annual report for 2021-22.

In January 2022, the RBI-mandated Sustainable Finance Group (SFG) did a survey with PSU banks, private and foreign banks. The central bank will include the feedback in the paper on climate change risk.

The SFG coordinates with other national and international agencies on issues relating to climate change. The group will suggest strategies and study evolving a regulatory framework to mitigate climate related risks in the Indian context, which can be adopted by banks and other financial institutions.

If India sticks to its goal of global coordination to control temperature rise, it will reduce greenhouse gases and energy consumption. However, it will also likely cause a significant rise in commodity and carbon prices which can feed into inflation following higher input costs, the central bank said.

Separately, the government intends to issue sovereign green bonds to facilitate climate change transition.

In the Union Budget for 2022-23, the government had announced plans to issue sovereign green bonds in the domestic market as a part of its overall market borrowing programme.

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