During a policy seminar on Climate Change Risks and Finance, RBI Governor Sanjay Malhotra remarked, “Central banks in advanced economies have typically adhered to an asset-neutral approach. Conversely, central banks in emerging and developing markets have implemented directed lending policies to allocate credit to specific sectors, based on their unique national circumstances and developmental goals.”

He emphasized that India’s priority sector lending framework enables the allocation of credit to renewable energy projects. “We’ve included funding for small renewable energy initiatives, such as solar, biomass, wind, micro-hydel plants, and non-conventional energy-based public utilities like street lighting systems and remote village electrification projects, as part of our priority sector lending guidelines,” Malhotra stated.

The RBI Governor noted that while the recognition of central banks’ role in managing climate-related financial risks is growing, the discussion surrounding their function in promoting financing for a green and sustainable transition remains nuanced and multi-faceted.

Malhotra stated that as a central bank, the Reserve Bank is aware of its responsibilities in addressing and mitigating climate change-related risks to the financial system. To this end, it aims to serve as a facilitator, supporting capacity building and establishing a favorable regulatory environment for green and sustainable finance.

“A significant challenge in green lending for sustainable finance is the heightened credit risk associated with borrowers employing new and emerging green technologies, which often lack a robust track record in terms of reliability and efficiency. Therefore, regulated entities must develop the necessary expertise to better assess risks associated with financing projects utilizing such green technologies,” Malhotra explained.

He pointed out that modeling climate-related financial risks is both crucial and data-intensive. Currently, there is insufficient data available to assess the financial impacts of climate change. To tackle this issue, the RBI announced the establishment of the Reserve Bank – Climate Risk Information System (RB-CRIS) in October last year.

“The repository is designed to fill data gaps with standardized datasets, including hazard data, vulnerability assessments, and exposure data for physical risk evaluations, as well as sector-specific transition pathways and carbon emission intensity databases for transition risk assessments. We are working on this repository and anticipate its launch later this year,” he added.

Malhotra also highlighted the essential roles of technology and finance in the shift toward a low-carbon economy, stressing the need for innovative solutions and capabilities in these domains. The Reserve Bank has been promoting and enabling innovations through its Regulatory Sandbox and Hackathon initiatives in the financial technology sector.

“We plan to establish a dedicated ‘on-tap’ cohort focused on climate change risks and sustainable finance under the RBI’s Regulatory Sandbox initiative. We are also organizing a special ‘Greenathon’ to address climate change and related topics,” Malhotra announced.

Additionally, he noted that various jurisdictions have begun their work on assessing and disclosing climate-related risks. Organizations like the International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS) Foundation have released standards for climate-related disclosures.

Furthermore, the Basel Committee on Banking Supervision (BCBS) has issued a consultative document addressing the disclosure of climate-related financial risks, aiming to incorporate these disclosures within the Pillar III requirements of the Basel framework.

“The Reserve Bank has already published draft guidelines on a Disclosure Framework for Climate-related Financial Risks in February 2024 for public commentary. We have received valuable input and are currently finalizing the guidelines. Additionally, we are developing a guidance note on Climate Scenario Analysis and Stress Testing for regulated entities,” Malhotra concluded.