Page 18 - Risk Management Bulletin January-June 2023

RMAI BULLETIN JANUARY - JUNE 2023

effectively manage them from a micro-prudential • indirect effects of climate change such as loss of
perspective ecosystem services (e.g., water shortage,
degradation of soil quality, or marine ecology)
C. Exploring how forward-looking tools like stress
testing and climate scenario analysis can be used Physical risk impact depends on geographical locations,
to identify and assess vulnerabilities in REs as different regions display varied climate patterns. For
D. Climate risk related financial disclosure and example,
• Expected cash flows to the REs from an exposure
reporting for REs
may be stressed on the occurrence of a local /
E. Capacity Building
regional weather event
F. Voluntary Initiatives
• Chronic flooding or landslides may present a risk
to the value of the collateral that REs have taken
Discussion Question 1: What should be the
as security against loansDiscussion Paper on
immediate priorities in shaping the policy discourse Climate Risk and Sustainable Finance
on climate risk in India? What actions would help
foster a more sustainable and resilient financial • Severe weather events may damage a RE’s owned
or leased physical property and data centers,
system?
thereby, affecting its ability to provide financial
The Discussion Paper (DP) starts with an overview of services to its customers
climate related risk, followed by suggestions regarding
the strategies outlined above. The objective of (ii) Transition Risks
outlining these measures is to evoke discussion and It refers to the risks arising from the process of
solicit feedback from REs / stakeholders on the adjustment towards a low-carbon economy. A range of
proposals contained in the DP. factors influences this adjustment, including changes
in climate-related policies and regulations, the
A. Overview of climate related risk and its emergence of newer technologies, shifting sentiments
and behaviour of customers. The process of transition
unique characteristics as applicable to REs
i.e., reducing carbon emissions may have a significant
A.1. An overview of climate-related issues impact on the economy. Transition risk drivers can be
Climate-related risks refer to the potential risks that categorized as:
may arise from climate change or from efforts to • Climate related mitigation policies could include
mitigate climate change, their related impact and the reduction in financial valuation or downgrade in
economic and financial consequences. It can impact credit ratings of businesses adversely affecting the
the financial sector through two broad channels i.e., climate or introduction of subsidies to encourage
physical risks and transition risks. the use of energy efficient goods/processes.
• Technological advances can contribute to energy
(i) Physical Risks
transition, increase the use of nonfossil fuels that
It refers to the economic costs and financial losses
reduce GHG emissions.
resulting from the increasing frequency and severity
of: • Shifts in public sentiment including that of
• extreme climate change-related weather events consumers and investors can affect the economy
(or extreme weather events) such as floods, and financial system.
heatwaves, landslides, storms and wildfires (i.e., For example,
acute physical risks); • Technological innovations such as production,

• longer-term gradual shifts of the climate such as storage, and transport of cleaner energy may
changes in precipitation, extreme weather decrease the value of assets dependent on the
variability, ocean acidification, and rising sea levels older technologies, i.e., the stranded assets, causing
and average temperatures (i.e., chronic physical mark-to-market losses on investment portfolios or
risks); and reduction in cash flow of certain borrowers.

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