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Source-This post on RBI and the net-zero transition has been created based on the article “RBI and the net-zero transition — A roadmap for green India” published in “The Indian Express” on 8 March 2024.
UPSC Syllabus-GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
News-The article discusses the new draft brought out by RBI to help banks understand and manage climate-related financial risks.
Context– As fossil-fuel consumption is phased down over the coming decades, the financial system will have to prepare for this change.
What is the net zero target?
It is a state in which a country’s emissions are compensated by the absorption and removal of greenhouse gases from the atmosphere.
Indian government has committed to cut its emissions to net zero by 2070 at the conference of parties-26(COP) summit.
Read more- Achieving Net Zero by 2070 and the Associated Challenges
What are the steps taken by the RBI to align its policies to the net zero target set by the government?
1) The introduction of lending to renewable energy under priority sector lending.
2) A framework for green deposits.
3) Releasing reports that assess climate risks.
What is the need to bring new draft by RBI?
1) As per RBI estimates, banks’ current exposure to utilities, metal and transport is relatively higher. The transition to net zero may have implications for the financing of these sectors.
2)There would be more demand for green investment after the decline in consumption of fossil fuel-based assets. It will become difficult for the financial system to strike a balance between two demands because most fossil fuel assets are funded by banks and other financial institutions.
What are the themes of reporting as per the new draft by RBI?
The draft by RBI sets three thematic pillars for reporting:
1) Governance- The framework expects financial institutions to provide information on their internal processes to ensure capacity or understanding of climate change-related issues and oversight.
2) Strategy– The regulated entities will have to specify the kinds of issues and impacts that may arise over different time horizons, that is, short, medium and long term. It is specifically important for long-term lending to sectors in transition and sectors that are prone to extreme weather events.
3) Risk Management-Transition risks can impact differently under the various scenarios. Therefore, the framework seeks information from entities on the assessment of stress through climate-scenario analysis.
RBI has taken a step forward by introducing the draft that aligns well with international standards. There is a need to keep a watch on the asset quality not just in fossil fuel-based sectors but also in “green” sectors to ensure a smoother journey to net zero.
Question for practice
How can the recent draft by RBI help financial sectors to ensure smooth transition to net zero target?
