Banks’ credit portfolio to be under RBI’s climate vulnerability scanner

MUMBAI: The Reserve Bank of India plans to soon come out with guidance for banks on stress testing for climate vulnerability of their credit portfolio, according to deputy governor M Rajeshwar Rao. He also said the consequences, intensity, severity, and frequency of climate events are hard to measure and difficult to predict, and the impact of these events on banks and financial institutions is even more difficult to quantify.

“Therefore, the first step in managing the risks to which banks and other regulated entities are exposed from climate events, is to measure the amount of exposure at risk. This is only possible if the firms adequately and transparently disclose the carbon intensity of their operations,” he said at a panel discussion on ‘Climate Implications for Central Banking’.

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 said the data related to exposure of firms, banks and financial institutions to climate events is crucial for planning the transition.

The International Sustainability Standards Board (ISSB) has been working on designing global sustainability-related disclosures. The standards will help improve trust and confidence in sustainability disclosures in companies and also create a common language for disclosure about the effect arising from climate-related risks and opportunities on their prospects.

The next step in this process, he said is to ensure availability of data and identification of vulnerabilities. “For this we need time-consistent, transparent, standardised, and forward-looking disclosures for identification of vulnerabilities. At a firm-level, the scenario analysis and stress testing would help frame the strategies to manage the risks for individual entities.

“Central banks across the globe are encouraging banks and other lenders to identify such vulnerabilities. In India, we plan on issuing guidance to banks on the stress testing for climate vulnerability of their credit portfolio soon,” he said. He also said 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.

According to him, 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. “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, standardisation, and integrity in the green finance market,” Rao said. Further, the deputy governor said that over the years, RBI 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.

He noted that 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.

Rao also 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,” he said. 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, he added.

Besides, Rao 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 $100 billion pledged by advanced economies, only $83.3 billion was provided in 2020, an increase of just 4 per cent from 2019. This trend needs to reverse, he said.