Synopsis
India is leading the charge in financing renewable energy projects through priority sector lending to promote a low carbon economy, as emphasized by RBI Governor Sanjay Malhotra during a recent seminar on Climate Change Risks and Finance.Key Takeaways
- India prioritizes renewable energy financing.
- RBI promotes green lending through regulatory frameworks.
- Climate change risk modeling is crucial.
- Data gaps are being addressed with RB-CRIS.
- Innovative solutions in finance are necessary.
New Delhi, March 14 (NationPress) India is at the forefront of financing renewable energy initiatives by incorporating them into “priority sector lending” to expedite the nation’s shift towards a low carbon economy in combating climate change.
During a policy seminar focused on Climate Change Risks and Finance, RBI Governor Sanjay Malhotra stated, “Central Banks in Advanced Economies have typically adhered to an asset-neutral approach. In contrast, Central Banks in emerging and developing markets have implemented directed lending policies to steer credit towards specific sectors based on their unique circumstances and developmental goals.
He emphasized that India’s guidelines for priority sector lending enable credit to be directed towards renewable energy. “We have incorporated financing for small renewable energy projects – such as solar, biomass, windmills, micro-hydel plants, and non-conventional energy-based public utilities like street lighting and remote village electrification projects – as part of priority sector lending,” Malhotra noted.
The RBI Governor highlighted that while the role of Central Banks in managing risks associated with climate change to the financial system is increasingly recognized, their involvement in facilitating the financing of green and sustainable transitions remains a topic of debate and varies significantly.
Malhotra acknowledged that as a Central Bank, the Reserve Bank is aware of its responsibility to address and mitigate risks to the financial system arising from climate change. In this regard, its aim is to act as a facilitator, including supporting capacity building and creating a favorable regulatory framework to promote green and sustainable finance.
“An essential aspect of green lending for sustainable finance is the heightened credit risk stemming from borrowers’ utilization of new and emerging green technologies, which often lack a substantial track record in terms of reliability, efficiency, and effectiveness. Hence, regulated entities must develop appropriate capacity and expertise to better assess risks in financing projects employing such green technologies,” Malhotra remarked.
He pointed out that modeling climate-related financial risks is vital and data-intensive, with limited data available for assessing the financial impacts of climate change. To tackle these challenges, the RBI announced the establishment of a repository known as the Reserve Bank – Climate Risk Information System (RB-CRIS) last October.
“The repository aims to fill data gaps by offering standardized datasets. These datasets encompass hazard data, vulnerability data, and exposure data related to physical risk assessments, sectoral transition pathways, and a carbon emission intensity database pertinent to transition risk assessments. Progress on this repository is ongoing, and we anticipate its launch later this year,” he added.
The RBI Governor also underlined that technology and finance play a crucial role in transitioning to a low-carbon economy. There is a pressing need to develop innovative solutions and skills in these domains. The Reserve Bank has been promoting and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives within the Fintech sector, he noted.
“We plan to establish a dedicated “on Tap” cohort focusing on climate change risks and sustainable finance under the RBI’s Regulatory Sandbox initiative. Additionally, we are organizing a special “Greenathon” centered on climate change and related topics,” Malhotra disclosed.
He mentioned that numerous jurisdictions have commenced efforts to assess and disclose climate-related risks. International organizations, such as the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) Foundation, have released standards pertaining to climate-related disclosures.
Furthermore, the Basel Committee on Banking Supervision (BCBS) has issued a consultative document regarding the disclosure of climate-related financial risks, aiming to integrate such disclosures under the Pillar III requirements of the Basel framework, he explained.
“The Reserve Bank has already released draft guidelines on the Disclosure Framework for climate-related financial risks in February 2024, inviting public feedback. We have received valuable insights and are in the process of finalizing these guidelines. A guidance note on Climate Scenario Analysis and Stress Testing is also being developed for the regulated entities,” Malhotra concluded.
