Given the looming climate emergency threatening the developing world, discuss the ways in which RBI can help regulate climate risk.

The possibility of irreversible negative effects from climate change, some of which the world is already experiencing, looms large. The RBI’s Discussion Paper on Climate Risk and Sustainable Finance examines the impact of climate change on the financial sector.

Link between Climate Change and Finance:

• The threat of climate change on financial transactions is actually quite obvious, even though a connection between the two may not be immediately apparent.
• For example, a loan collateral losing value owing to flooding induced by climate change is a real possibility in places like Uttarakhand and Himachal Pradesh.

Paving the way for Climate in Finance:

• Need to define what is green – It is crucial to ascertain if the loan or investment activity is associated with adaptation to or mitigation of climate change.
• In order to encourage foreign investments and raise investor trust, the definition of “green” should be in line with global norms.
• Rbi can offer additional practical assistance that banks may need when calculating capital adequacy in accordance with the Basel criteria and accounting for climate risk.
• The RBI can take a proactive approach and establish best practices that banks can follow, such as assisting their borrowers in transitioning to carbon neutrality through bespoke advisory services and capacity building.

Way forward:

The Bank of England is the forerunner in this regard, and the RBI may emulate this one-of-a-kind initiative to truly walk the talk and, in the process, apply its first-hand learnings to fine-tune the evolving policy framework on climate risk.