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BFSI Chronicle, 11 Edition September2022
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In particular, interest in green bonds and green iii. Coordinating with other financial regulators
finance is progressively gaining momentum as it has to better understand the climate-related risks
become a priority for many issuers, asset managers, to the financial system and those related to a
and governments alike. Global issuance of green transition to a low-carbon economy.
bonds surpassed $250 billion in 2019 about 3.5% of
total global bond issuance ($7.15 trillion). Projections vi. Advising regulated entities to have a strategy to
estimate that global issuance of a green bond is a high address climate change risks and appropriate
possibility of issuance surpassing $1 trillion in 2023. governance structures to effectively manage
them from a micro-prudential perspective.
As the risks and opportunities and financial impact
arising from climate change vary across jurisdictions, v. Exploring forward-looking tools like climate
this poses unique considerations for an emerging scenario analysis and stress testing for assessing
economy like India. The challenge before us is climate-related risks.
to mainstream green finance and think of ways
to incorporate the environmental impact into It is, therefore, important for the regulated entities to
commercial lending decisions while simultaneously understand the interaction between climate-related
balancing the needs of credit expansion, economic and environmental risks and their business activities
growth, and social development. and identify the potential effect of such risks through
various prudential risk categories including:
Federal Reserve official said the central bank still
was considering all its options for how best to gauge Credit Risk: Rising frequency and severity of extreme
risks for banks from climate change, as a fellow U.S. weather events can impair the value of assets held
banking regulator urged an open mind to a wide by the banks’ customers, or impact supply chains
range of approaches. affecting customers’ operations and profitability,
and viability.
Sustainable Finance Group (SFG) was set up within
the Department of Regulation in the Reserve Bank Market Risk: Exposed to a decline in valuation and
which will be spearheading RBI’s efforts and increased volatility in their investments because of
regulatory initiatives in the areas of sustainable shifts in investor preferences or climate-induced
finance and climate risk. adverse effects on the underlying economic activity.

Initiatives contemplated and discussed within Liquidity Risk: Increased demand for liquidity to
the Reserve Bank are: respond to extreme weather events or the difficulties
that may be faced in liquidating assets given their
i. Integrating climate-related risks into financial negative impact.
stability monitoring.
Operational Risk: Disruption in business continuity
ii. Building in-house capacity for assessment and due to the impact on the bank’s infrastructure,
monitoring of Climate Risk and generating processes, staff, and systems. In addition, exposure
awareness of climate-related risks among to claims from stakeholders who have suffered
regulated entities. climate-related losses and who then seek to recover
those losses.

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