Central banks need to incorporate climate-related risks in supervisory framework: RBI deputy governor

The deputy governor further said over the years, Reserve Bank has been taking various policy measures to promote and support green finance initiatives

Mumbai: Central banks need to incorporate climate-related risks into their supervisory frameworks in order to contribute to the development of frameworks and standards for green finance, said RBI Deputy Governor M Rajeshwar Rao.

Participating in a panel discussion on ‘Climate Implications for Central Banking’, he stressed that financing the new green ventures alone will not be enough and there is a need for credible transition plans for existing emitting firms without compromising their output or growth.

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“For this to materialise, central banks can incorporate climate-related risks into their supervisory frameworks and can contribute to the development of frameworks and standards for green finance. These frameworks can help promote transparency, standardization, and integrity in the green finance market,” he said.

On Tuesday RBI released the remarks of Rao at the panel discussion organised by the IMF and Center for Social and Economic Forum on July 19 in New Delhi.

The deputy governor further said over the years, Reserve Bank has been taking various policy measures to promote and support green finance initiatives.

For example, he said, finance to renewable energy projects have been included as part of Priority Sector Lending (PSL) portfolio of banks.

“Earlier this year the Reserve Bank supported Government of India in successfully issuing sovereign green bonds (SGrBs). The proceeds of the SGrBs are intended to be deployed in public sector projects which will help in reducing the carbon intensity of the economy,” Rao said.

The issuance of SrGBs would also help in price discovery for other financial instruments and give a fillip to development of a market for green financing ecosystem in the country.

Global understanding of systemic impact of climate change on the economy and the financial system is evolving and, accordingly, the responses of central banks and supervisors around the world have also been developing.

He stressed on the need to undertake a large-scale capacity building effort to equip central banks, financial firms, real economy players to understand, assess and plan for the climate issues and related financial risks.

“Only then would they be able to innovate, make strategic decisions, mobilise capital and build effective transition plans for achieving sustainability targets,” Rao said, and added that a very important aspect of this capacity building is going to be the handholding of the smaller firms and MSMEs to make it easier for them to navigate the transition.

The RBI official also noted that on ground, implementation of various climate finance commitments from advanced economies has been far from satisfactory and the gap between what is being done and what needs to be done is only growing.

As against the amount of USD 100 billion pledged by advanced economies, only USD 83.3 billion has been provided in 2020, an increase of just 4 per cent from 2019.

This trend needs to reverse, he said.