Climate risks in finance

Dear Readers,

How are you dealing with the weather change in your city? Mumbai, Bengaluru, Kochi, Chennai are very hot even before the summer begins. Temperatures are rising day by day. We took too long to understand that climate change is a real threat and are further taking too much time to react and execute policies to mitigate the impact of climate change. Viral diseases that are driven by drastic seasonal changes are increasing. People are getting sick, farmers are losing crops due to unprecedented natural calamities, glaciers are melting and the earth is becoming hotter every year. The biggest challenge in the digital era will be dealing with climate change.

This week, the Reserve Bank of India released draft guidelines on financial risks related to climate. India’s central bank wants all the regulated entities – banks, NBFCs, small finance banks, and payments banks to disclose the climate risks in a structured format. In the draft paper, Draft Disclosure Framework on Climate Related Financial Risks, 2024, the RBI has explained in detail the meaning of climate resilience, greenhouse gasses, emissions and physical risks, etc.

The RBI has structured the guidelines into four thematic parts: Governance, Strategy, Risk Management, and Metrics and Targets. Under each segment, it has explained what kinds of disclosures regulated entities should make.

The RBI wants banks and financial institutions to be ready for climate related risks. The guidelines expect entities to disclose a few of the following:

- How the nature, likelihood and magnitude of effects of climate-related financial risks are assessed (for example, whether the RE considers qualitative factors/ quantitative thresholds/ a combination of both);

- Climate-related issues that could reasonably be expected to affect the RE’s prospects (in terms of strategy, business model, decision-making, revenue, costs, assets, etc.)

- Description of what they consider is ‘short term’, ‘medium term’ and ‘long term’ horizon and how are these definitions linked to the planning horizon for strategic decision-making;

- Description of specific climate related issues that would arise over various time horizons (short/ medium/ long term) and the material impact it could have on the RE;

- The processes and frequency by which the body(ies) or the individual position(s) is informed about climate-related issues;

The effects (and the anticipated effects) of climate-related issues on the financial position and financial performance for the financial year, over short, medium and long term, taking into consideration how those climate-related issues have been factored into financial planning;

- The climate resilience of RE’s strategy including the business model to climate-related changes, developments and uncertainties;

Apart from this RBI is also holding the senior management and boards of directors responsible and has asked to disclose whether and how climate-related considerations are factored into the remuneration of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers. Also, disclose the percentage of remuneration recognised in the current financial year that is linked to climate-related considerations.

Climate change has been a part of the Reserve Bank of India's agenda, which has been a part of global initiatives on climate change. It has been coming out with guidelines directing regulated entities to take action. In its Report on Currency and Finance (RCF) for 2022-23, the RBI emphasised the impact of fiscal policy on steering energy transition and investments. The report delved into the intricate and non-linear interactions among climate dynamics, the economy, financial systems, and associated policies while addressing the role of central banks, including the RBI, in climate action. It asserted that for a sector-specific approach to green transition to be successful, substantial and consistent progress must be made across all pivotal carbon-emitting sectors.

What can be done?

While RBI is doing its mite, a lot more needs to be done. Ideally, every company should incorporate policies to face climate change, starting from reducing the usage of plastic to managing the carbon footprint. If we audit diligently we will certainly find that most of the offices are burning energy without any usage. Apart from the companies, I would be excited to see startups entering into the climate tech area. Currently, a negligible number of startups are part of this domain. At the same time, investors should also fund climate tech startups. How to use AI and empower the whole climate related issues. Of course, digital can't resolve all the issues. But it can certainly offer some tools. How to make energy and air clean? How to embrace a green approach? What are the major pain points today?

I have noticed a trend towards healthy and organic eating as people have seen the massive impact of junk and packaged foods on health. Similarly, to face climate change, there should be a plan. While policymakers will have to make bold decisions, every individual should contribute. Even a small move of gradually eradicating plastic will help us a lot.

Many central banks and financial institutions in the world have already been very aggressive in the climate segment. They have appointed dedicated resources like Chief Sustainability Officers. Recently, the State Bank of India also redesignated its DMD Chief Credit Officer to Chief Sustainability Officer of the bank. Also, the bank planted 7.60 lakh trees during FY 2023-24.

Talks over ESG and climate change are part of the boardroom and conference rooms these days. But we have no time to talk and react at an unimaginable speed to find a shed for our future.

Well, India's growth story remains intact as the GDP belied predictions to grow at a spectacular 8.4% YoY in the Q4 of FY23-24.

Also read my old piece on the same subject: Let's have a green plan for the New Year

Also, we are holding our eighth edition of the BFSI CIO conclave next week in Mumbai. The theme of the summit is ‘Supercharging Innovation’ and we will have leading CXOs from the BFSI sector joining us. Register to participate in the event which will have the industry stalwarts brainstorming on the emerging best trends in the BFSI sector.

Like always, I am sharing with you the top five stories of the week, Trust you will find them meaningful.

1. 'Cashless Everywhere' to get a boost after SC's warning on standardising hospital charges

2. What is the future of Paytm Bank after Vijay Shekhar Sharma’s stepdown?

3. Startups are going to be India's backbone, it’s our time under the sun: Piyush Goyal

4. Connected banking is key to distribution network, says Open CEO

5. Going global is easier for successful cos in India, scale already proven: PhonePe CEO

Happy Reading!

Amol Dethe,

Editor,

ETBFSI.