RBI paper on Climate action has suggestions worthy of adoption.

Source– The post is based on the article “RBI paper on Climate action has suggestions worthy of adoption” published in The mint on 13th September 2022.

Syllabus: GS3- Environmental Pollution and Degradation.

Relevance– About global public goods that benefit the whole world population.

News– The article is about the climate risk discussion paper that encourages the financial sector to prioritise green-transition financing and ensure long term system stability by addressing the threats of climate change.

What the consultation paper talk about?

The paper explains physical climate impact risk and transition loss risk in the financial sector.

It provides broad guidance, good practice for regulated entities in the financial sector about governance, strategy, processes and risk management structure to address climate risk.

It emphasises on financing opportunities available for climate transition. To have foreign financing in environmentally sustainable business will require incentivisation of green transition from linear economy model to circular economy model.

What are the suggestions put up in the paper?

Extreme weather events and India rank among 10th worst affected countries in climate risk index calls for quick action.

Quantitative and qualitative issues-Both need to be incorporated in climate risk mitigation strategies. We need to take a balanced approach as regulated entities are saddled with capital commitments, liquidity buffers, cash reserve requirements and CSR requirements.

Qualitative issues-

• Asking for information on climate-impact parameters from corporates during the credit appraisal stage should be mandated.
• strength the capital buffers and incentivise the sectors that contribute less towards climate change through lower risk capital weightage.
• Due to the absence of data on climate change default probabilities,stress testing, forecasts or scenario analysis could be used as short term methodology for loss estimates of lending.

Quantitative issues-

• Sector and region-wise concentration needs progressive rationalisation.
• For reduction in scope 1 emissions i.e., direct emissions by entity and scope 2 emissions i.e., indirect emission like from electricity it buys, investment should be incentivized. It will reduce their carbon footprints by renewable energy and lower carbon footprints across data centres.
• There is a need for an increase in regulated entities financing for newer decarbonisation technology, green hydrogen and renewable energy and reducing the financial entities exposure to polluting industries and promoting lending to cooling technology providers.
• For banks, there is a need to incentivise sustainable financing via risk weight concessions and realignment of PSL guidelines. Climate financing should make up part of 40% PSL targets.
• For regulated entities that meet short of target, there is a need for a mechanism for issuing climate transition certificates on lines of carbon credits.

Ultimately, corporations and regulated entities need to embed sustainability at the core of their business.