The finance industry and the economy are both seriously threatened by climate change. In addition to presenting financial and transitional concerns, the climate-related catastrophes we are already seeing will have a significant impact on the economy.

Communities and infrastructure may suffer greatly as a result of severe weather-related catastrophes, necessitating long-term government restoration and reconstruction efforts that might strain the state budget. Given their existing high levels of public debt, many nations will struggle to raise the money needed for rebuilding. Any such extra financial strain would negatively affect the nation’s actual economy and result in slow growth, which will ultimately affect GDP.

According to projections, in a catastrophic scenario, climate change might result in a loss of up to 26.5% of the world’s GDP, while by 2070, India’s GDP could potentially decline by 25%.

Therefore, it is essential that all nations prioritize adaptation efforts, which are projected to cost between $280 and $500 billion by 2050. Currently, much less money is required for adaptation.  The importance of climate adaptation and the role central banks and regulators may play in mitigating its consequences are highlighted in a November statement published by the Network for Greening the Financial System (NGFS). It urges both established and growing developing countries to bridge insurance protection gaps, promote adaptation funding, and include adaptation into risk management.

The Reserve Bank of India (RBI) hosted this year’s NGFS annual plenary meeting in New Delhi on March 11 and 12.

The two-day event facilitated the sharing of experiences among member central banks in addressing climate change-related concerns and associated financial risks, according to an official announcement.

First Deputy Governor of Deutsche Bundesbank and NGFS Chair Sabine Mauderer claims When it comes to monetary policy and financial stability, our members take climate change into account. The effects of climate change on the global economy and financial system are well shown by our study. Regretfully, central banks and regulators will need to pay much more attention to climate-related financial risks since these effects are expected to become considerably more noticeable in the future.

This statement highlights that even central banks must consider the financial risk associated with climate change in their monetary policy, in addition to the state’s efforts to transition to a green economy through their committed nationally determined contribution plans to switch to alternative green energy sources.

Accordingly, they must give regulated entities tools to evaluate the credit, market, and operational risks impacted by climate change. They must also give a framework for evaluating and mitigating these risks, as well as for making disclosures on a base and enhanced basis.

In addition to providing the tools and metrics required for improved assessment and disclosure of adaptation, there is a need to raise awareness and develop capacity in terms of knowledge and abilities. Central banks are under more pressure than ever to facilitate regulatory, supervisory, and policy frameworks that support adaptability.

Both financial and non-financial organizations should include these in their risk management strategies. Central banks must create an environment for improved adaptation financing since it hasn’t yet reached the anticipated levels. In order to work together at the world level with initiatives that prioritize local consideration, there is a greater need for global collaboration from all stakeholders.

In his speech at the recent policy seminar on climate change risks and finance, Governor Sanjay Malhotra of the RBI emphasized the two aspects of climate change-related risks: financing the green and sustainable transition and developing the ecosystem’s capacity; the prudential aspect, which is connected to risk management.

He went into depth about the several actions RBI has done in these areas so far. Additionally, he alluded to upcoming efforts to develop the ecosystem for financing adaptation and the availability of data tools and indicators via the Climate Risk Information System (RB-CRIS). These datasets contain sectoral transition routes, carbon emission intensity databases associated with transition risk assessment, and hazard, vulnerability, and exposure data linked to physical risk assessment.

Since technology and finance are essential to the shift to a low-carbon economy, the RBI is also promoting and supporting innovations in the Fintech sector via its regulatory sandbox and hackathon program.

Because there aren’t many bankable green initiatives, the RBI Governor also emphasized the need for developing knowledge and experience and creating a common pool for funding them. Additionally, experience in funding these kinds of initiatives is required. Even though the RBI has made significant progress in this area, more urgent action is required to have the regulated businesses ready to handle the financial and transitional risks.

“To achieve our vision of a financial system that will not only withstand future climate shocks but also actively contribute to India’s journey towards a sustainable and resilient future,” said Sanjay Malhotra.

This proposal is both effective and timely. We may anticipate that the regulated firms and the regulator will collaborate to achieve this same goal.