Financial system risks from climate change – UPSC GS3

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Recent Climatic Events:
  • Landslides, floods and other rain-related accidents in Maharashtra.
  • Gandhak river flood in Bihar.
  • Heat waves in Canada and the north-west coast of the US, with temperatures reaching 50° Celsius, have killed close to 500 people.
  • Uncharacteristic rains flooded Germany and Belgium, claiming about 200 lives.
  • Similar abnormal rains and flooding in central China affected 2 million citizens and resulted in economic losses of over $500 million.
How Climatic events will impact economy?
  • Supply chain disruptions, business continuity problems,
  • Labour productivity diminution,
  • Lower investment rates,
  • Contraction in collateral values, and defaults by businesses and households,
  • All of the above might lead to problems of overall financial instability.
Network for Greening of the Financial System (NGFS):
  • Most of the central banks have been working to assess financial system risks from climate change, figuring out how to design stress-testing maps and trying to finalise risk mitigation models.
  • NGFS was set up during the 2017 Paris ‘One Planet Summit’ for central banks and supervisors to share best practices in climate-related risk management practices.
  • The network already has 95 central banks as members and 15 multilateral financial institutions as observers.
  • The Reserve Bank of India (RBI) joined NGFS in April 2021.
The Challenges faced by RBI in green financing:
The Reserve Bank of India (RBI) in its July bulletin mentioned, the need for monetary-policy frameworks to incorporate climate-change risks, but refrained from explicitly expressing a desire to re-examine its own monetary policy framework or indicating whether it is moving in that direction.
RBI faces two peculiar challenges that will test its resolve in the days ahead.
  1. India’s unique and differentiated position in the climate change battle when compared with developed nations. Rich countries and their institutions are marching ahead with their agenda of net zero emissions by 2050, which is at odds with India’s developmental challenges.
  2. Like all other central banks, RBI is bound by a mandate fixed by the legislative.
    • The preamble to the Reserve Bank of India Act, 1934, states that monetary policy’s “primary” objective is price stability, “while keeping in mind the objective of growth”.
    • This could skew RBI’s attempts to foster a green financing compact within the Indian financial system.
Suggestions to improve RBI’s green financing:
  • The RBI will have to leverage its NGFS membership to access global best practices, but will also have to tweak the framework to suit India’s development imperatives.
  • In addition, the RBI will also have to act as a champion for other developing and poor nations by developing an alternative but sustainable model.
  • The RBI has to balance its NGFS commitments versus its constitutional mandate of fostering “growth”. Therefore, the RBI will have to either seek legislative amendments or establish a legitimate work-around.
The RBI can no longer afford to ignore the compelling imperatives of green financing or overlook how climate change is slowly but surely eroding financial stability.
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