RBI’s Discussion Paper and Survey on Climate Risk and Sustainable Finance

The Sustainable Finance Group (SFG) in the Department of Regulation (DoR), Reserve Bank of India (RBI), carried out a survey1 in January 2022 to assess the status of climate risk and sustainable finance in leading scheduled commercial banks. The responses indicate that although banks have begun taking steps in the area of climate risk and sustainable finance, there remains a need for concerted effort and further action in this regard. The feedback from the survey will help in shaping the regulatory and supervisory approach of the RBI to climate risk and sustainable finance.

Key Observations from the Survey

Board-level engagement and responsibility: Board-level engagement on climate risk and sustainable finance is inadequate. In about a third of the banks that were surveyed, responsibility for overseeing initiatives related to climate risk and sustainability was yet to be assigned. Furthermore, only a few banks have included climate risk / sustainability / environmental, social and governance (ESG) related Key Performance Indicators (KPIs) in the performance evaluation of their top management.

Strategy: A majority of the banks did not have a separate business unit or vertical for sustainability and ESG-related initiatives. Only a few banks had a strategy for embedding ESG principles in their business, scaling up their sustainable finance portfolio and incorporating climate change risks into their existing risk management framework.

Risk management: Almost all the surveyed banks recognized the urgency of the issue, and most of them considered climate-related financial risks to be a material threat to their business. Physical and transition risks were seen as the main sources of climate-related risks3. Some of the banks are not just considering climate and environment-related risks, rather they are also focusing on the social and governance aspects while evaluating credit proposals above a certain amount. A few banks are also attempting to quantify the amount of their loan and investment portfolio that is susceptible to such risks.

Transition to low-carbon exposure: Most of the surveyed banks have decided to gradually reduce their exposure to high-carbon emitting/polluting businesses in the coming years. A few banks have either mobilized new capital to scale up green lending and investment or set a target for incremental lending and investment for sustainable finance. Most banks have launched a few loan products to tap the opportunities from climate change. A few banks have also launched green deposits to scale up lending to environment-friendly businesses.

Climate-related financial disclosures: A majority of the banks have not aligned their climate-related financial disclosures with any internationally accepted framework.

Moving towards a low-carbon environment in banking operations: Most banks have either taken some measures or have plans to decrease the absolute carbon emissions arising from their operations and increase the proportion of renewable energy in their total sourced electricity. A few banks have either announced time-bound plans or plan to come up with a roadmap over the next 12 months to become carbon-neutral.

Capacity building and data gaps: Most banks are looking at capacity building to better understand thefinancial implications of climate risk4. Further, most banks felt that the available data was insufficient for an appropriate assessment of climate-related financial risks and the processes and methodologies to measure and monitor climate-related financial risks were also not sufficiently developed.

RBI has also issued a Discussion Paper on Climate Risk and Sustainable Finance outlining climate related risk and its unique characteristics applicable to REs, as well as broad guidance for risk management and climate risk related financial disclosure and reporting for REs.

  1. Overview of climate related risk and its unique characteristics as applicable to REs
  2. Broad guidance for all REs to have (i) appropriate governance (ii) strategy to address climate change risks and (iii) risk management structure to effectively manage them from a micro-prudential perspective
  3. Exploring how forward-looking tools like stress testing and climate scenario analysis can be used to identify and assess vulnerabilities in REs
  4. Climate risk related financial disclosure and reporting for REs
  5. Capacity Building
  6. Voluntary Initiatives

Read the RBI’s Discussion Paper on Climate Risk and Sustainable Finance on here

Download the report of RBI’s survey on Climate Risk and Sustainable Finance