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    inclusion of climate change in policy is crucial for a strong economy

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    Inclusion of climate change in policy is crucial for a strong economy

    In July 2022, the Reserve bank of India (RBI) released a discussion paper that covers the issue of climate risks and sustainable finance.

    Inclusion of climate change in policy is crucial for a strong economy

    August 27th, 2022August 27th, 2022CommentsViews : 508

    List of Contents

    About the RBI recent discussion paper

    What is the importance of the RBI’s recent consultation paper?

    What are the issues in the discussion paper?

    Why should the central banks acknowledge the climate change risks?

    What are various measures related to the acknowledgement of climate change risks?

    What should be done?

    Source: The post is based on the article “Inclusion of climate change in policy is crucial for a strong economy” published in the Indian Express on 27th August 2022.Syllabus: GS 3 Indian Economy; Ecology and EnvironmentRelevance: Monetary Policies dealing with the climate change issuesNews: In July 2022, the Reserve bank of India (RBI) released a discussion paper that covers the issue of climate risks and sustainable finance.

    About the RBI recent discussion paper

    The RBI’s earlier research papers or report could not address the comprehensive risk assessment.

    Therefore, this paper seeks to understand preferred approaches to identification and disclosure of exposures to climate-related risks, transition risks, frameworks for management of risks and capacity building within the banking sector etc.

    The RBI wants to assess the preparedness of the system rather than indicate its own approach to what a central bank can do.

    What is the importance of the RBI’s recent consultation paper?

    It shows the Reserve Bank’s inclination to address emerging risks from climate change and a full assessment of macro-risks that may arise from disinvestment from fossil fuel-based assets.

    Further, the discussion paper also indicates the RBI’s understanding of the requirements of the regulatory changes.

    The paper allows the RBI to respond based on existing practices and a better understanding of the risk profiles of banks.

    What are the issues in the discussion paper?

    The scope of discussion in the paper remains limited and without a general narrative on the central bank’s role.

    It does not detail the various instruments such as capital requirements for fossil fuel-based lending by banks or credit guidance that can be worked by a central bank to ensure the greening of the financial system.

    Why should the central banks acknowledge the climate change risks?

    (1) Exposure of assets to extreme weather events and loss of asset value due to a green transition are imminent risks to the financial system.

    (2) Inclusion of climate change in a central bank’s policy response remains unaddressed. Climate change is a significant threat to financial stability and the central banks are “failing to do its job” to address climate risk.

    (3) Central banks can guide the flow of finance by restricting the flow of credit to fossil fuel-dependent sectors.

    What are various measures related to the acknowledgement of climate change risks?

    Globally

    (1) Some Central Banks have adopted a range of best practices and approaches. For example, (a) the Bank of Lebanon sets different reserve requirements for loans linked to energy savings, and (b) the People’s Bank of China offers positive incentives to commercial banks for extending green credit,

    India

    (1) The Reserve Bank of India has included renewable energy (RE) within priority sector lending.

    (2) In 2021, the RBI joined the Network for Greening Financial System which promotes the exchange of best practices on green finance across the world.

    (3) In 2021, RBI issued research papers indicating a growing acknowledgement of risks to the financial system. The RBI has acknowledged that extreme weather events can elevate inflation.

    (4) In 2022, RBI estimated the direct and indirect exposure of Indian banks to green transition in India.

    What should be done?

    While the RBI, disclosures and risk assessment frameworks are a starting point. It remains to be seen what macro and micro-prudential regulations will be introduced by the Reserve Bank of India (RBI).

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    स्रोत : blog.forumias.com

    Inclusion of climate change in policy is crucial for a strong ...

    Context The article discusses the growing pressure to achieve climate-compatible growth as the world copes with the repercussions of legacy emissions. The article also highlights that fiscal and monetary authorities will now have to be cognizant (aware) of the feedback from climate change to the economy and suitably adapt their policy responses. Risks to Financial Stability due to Climate Change: Climate change poses risks to financial stability in the form of: Physical risks: Caused by extreme and slow onset weather events Transition risks: Caused by changes in policy, legal and regulatory frameworks, consumer preferences and technological development and loss of asset value while transitioning to a low-carbon economy. Climatic events can impact overall financial instability owing to the following: Supply chain disruptions and business continuity problems Decreased labour productivity Lower investment rates Contraction in collateral values, defaults by businesses and households etc. Global approach to promote green finance Prioritize credit flow: Central banks can guide the flow of finance by restricting the flow of credit to fossil fuel-dependent sectors. Approach: Central Banks also adopt a series of measures and best practices to streamline the flow of green finance. For example, the Bank of Lebanon sets different reserve requirements for loans linked to energy savings. The People’s Bank of China offers positive incentives to commercial banks for extending green credit. RBI approach considers response based on understanding of the risk profiles of banks India measures to streamline green finance Preferable lending: India includes renewable energy (RE) within priority sector lending (PSL). Global partnerships: In 2021, RBI joined the Network for Greening Financial System, a voluntary group of 116 central banks that promotes the exchange of best practices on green finance. RBI mandate: In recent years, the RBI has moved to acknowledge the risks climate change will pose to financial stability. Survey report: The Report of the Survey on Climate Risk and Sustainable Finance, released by RBI in July, 2022 seeks to understand preferred approaches to identification and disclosure of exposures to climate-related risks, frameworks for management of risks and capacity building within the banking sector. It reflects that RBI prefers to tread carefully by assessing the preparedness of the system rather than indicate its own approach to what a central bank can do. RBI earlier acknowledgement of risks: In 2021, an RBI research paper demonstrated that extreme weather events can elevate inflation as was demonstrated by wheat prices this year. RBI also set up a Sustainable Finance Group to coordinate with other national and international agencies on issues relating to climate change. In 2022, RBI while estimating the exposure of Indian banks to green transition found that direct exposure of public and private banks to fossil fuel-based sectors, i.e. electricity, chemicals, and automobiles may be concerning. RBI also noted that major private banks have not discussed the risks and opportunities related to climate change and sustainability which can be bad news for the government’s ambition to decarbonize the economy. RBI challenges in mainstreaming green finance India’s differentiated position in the climate change battle: Rich countries and their institutions are marching ahead with their agenda of net zero emissions by 2050, which can hamper India’s developmental challenges in near future. RBI fixed mandate: The RBI is bound by a mandate fixed by the legislative and preamble to the Reserve Bank of India Act, 1934. It 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. Way forward Changes in climate-related policies: Climate related mitigation policies could include reduction in financial valuation or downgrade in credit ratings of businesses adversely affecting the climate or introduction of subsidies to encourage the use of energy efficient goods/processes. Task Force on Climate-Related Financial Disclosures (TCFD): To overcome climate-related risk, TCFD is an international standard for climate-related risk disclosure. It could be a good starting point for all stakeholders including investors and regulators and to bridge the asymmetric information barriers between banks and investors. Capacity building and training: The training linking climate change and finance across the board including senior management can potentially foster a culture of integrating climate change in all decision making. Mitigating risks: The risk to public borrowing from declining fossil fuel revenue also needs to be established. Forward-looking tools: Stress testing, climate scenario analysis etc. are forward looking tools which are used to assess the true risks of climate change rather than existing tools that are largely based on historical data, and do not capture the true climate change risks. Comprehensive assessment: A full assessment of macro-risks from disinvestment of fossil fuel-based assets requires a clear identification of the horizon for phasing down fossil fuels across sectors and an overall net zero plan for the disclosures to be used objectively is also needed alongside.

    Inclusion of climate change in policy is crucial for a strong economy

    Aug. 27, 2022

    Context

    The article discusses the growing pressure to achieve climate-compatible growth as the world copes with the repercussions of legacy emissions.

    The article also highlights that fiscal and monetary authorities will now have to be cognizant (aware) of the feedback from climate change to the economy and suitably adapt their policy responses.

    Risks to Financial Stability due to Climate Change:

    Climate change poses risks to financial stability in the form of:

    Physical risks: Caused by extreme and slow onset weather eventsTransition risks: Caused by changes in policy, legal and regulatory frameworks, consumer preferences and technological development and loss of asset value while transitioning to a low-carbon economy.

    Climatic events can impact overall financial instability owing to the following:

    Supply chain disruptions and business continuity problems

    Decreased labour productivity

    Lower investment rates

    Contraction in collateral values, defaults by businesses and households etc.

    Global approach to promote green finance Prioritize credit flow: Central banks can guide the flow of finance by restricting the flow of credit to fossil fuel-dependent sectors.Approach: Central Banks also adopt a series of measures and best practices to streamline the flow of green finance.

    For example, the Bank of Lebanon sets different reserve requirements for loans linked to energy savings.

    The People’s Bank of China offers positive incentives to commercial banks for extending green credit.

    RBI approach considers response based on understanding of the risk profiles of banksIndia measures to streamline green financePreferable lending: India includes renewable energy (RE) within priority sector lending (PSL).Global partnerships: In 2021, RBI joined the Network for Greening Financial System, a voluntary group of 116 central banks that promotes the exchange of best practices on green finance.RBI mandate: In recent years, the RBI has moved to acknowledge the risks climate change will pose to financial stability.Survey report: The Report of the Survey on Climate Risk and Sustainable Finance, released by RBI in July, 2022 seeks to understand preferred approaches to identification and disclosure of exposures to climate-related risks, frameworks for management of risks and capacity building within the banking sector.

    It reflects that RBI prefers to tread carefully by assessing the preparedness of the system rather than indicate its own approach to what a central bank can do.

    RBI earlier acknowledgement of risks: In 2021, an RBI research paper demonstrated that extreme weather events can elevate inflation as was demonstrated by wheat prices this year.

    RBI also set up a Sustainable Finance Group to coordinate with other national and international agencies on issues relating to climate change.

    In 2022, RBI while estimating the exposure of Indian banks to green transition found that direct exposure of public and private banks to fossil fuel-based sectors, i.e. electricity, chemicals, and automobiles may be concerning.

    RBI also noted that major private banks have not discussed the risks and opportunities related to climate change and sustainability which can be bad news for the government’s ambition to decarbonize the economy.

    RBI challenges in mainstreaming green financeIndia’s differentiated position in the climate change battle: Rich countries and their institutions are marching ahead with their agenda of net zero emissions by 2050, which can hamper India’s developmental challenges in near future.RBI fixed mandate: The RBI is bound by a mandate fixed by the legislative and preamble to the Reserve Bank of India Act, 1934. It 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.Way forwardChanges in climate-related policies: Climate related mitigation policies could include reduction in financial valuation or downgrade in credit ratings of businesses adversely affecting the climate or introduction of subsidies to encourage the use of energy efficient goods/processes.Task Force on Climate-Related Financial Disclosures (TCFD): To overcome climate-related risk, TCFD is an international standard for climate-related risk disclosure. It could be a good starting point for all stakeholders including investors and regulators and to bridge the asymmetric information barriers between banks and investors.Capacity building and training: The training linking climate change and finance across the board including senior management can potentially foster a culture of integrating climate change in all decision making.

    स्रोत : vajiramias.com

    Suranjali Tandon writes: Inclusion of climate change in policy is crucial for a strong economy

    Suranjali Tandon writes: RBI needs to be cognisant of risks climate change poses to economy

    Inclusion of climate change in policy is crucial for a strong economy

    Inclusion of climate change in policy is crucial for a strong economy Suranjali Tandon writes: RBI needs to be cognisant of risks climate change poses to economy

    Written by Suranjali Tandon

    Updated: August 27, 2022 8:57:39 am

    Suranjali Tandon writes: RBI’s past research papers also indicate a growing acknowledgement of risks to the financial system. (File Photo)

    As the world copes with the repercussions of legacy emissions, there is growing pressure to achieve climate-compatible growth. Fiscal and monetary authorities will now have to be cognisant of the feedback from climate change to the economy and suitably adapt their policy responses. Exposure of assets to extreme weather events and loss of asset value due to a green transition are imminent risks to the financial system.

    Yet, the inclusion of climate change in a central bank’s policy response function is a widely contested issue. Some experts see no harm in the bank’s internal assessment of the impact climate change would have on the economy but shy away from asking the bank to actively set a monetary policy based on such assessments. Others argue that climate change is a significant threat to financial stability and a central bank that does not address climate risk is “failing to do its job”.

    Read in Explained |Explained: What are the economic stakes of climate change?

    Central banks can guide the flow of finance by restricting the flow of credit to fossil fuel-dependent sectors. Central Banks adopt a range of best practices and approaches. For example, the Bank of Lebanon sets different reserve requirements for loans linked to energy savings. The People’s Bank of China offers positive incentives to commercial banks for extending green credit and India includes renewable energy (RE) within priority sector lending.

    The RBI has been measured yet receptive in addressing the concern. In 2021, it joined the Network for Greening Financial System, a voluntary group of 116 central banks that promotes the exchange of best practices on green finance. In July 2022, it released a discussion paper that covers the issue of climate risks and sustainable finance. The paper seeks to understand preferred approaches to identification and disclosure of exposures to climate-related risks, frameworks for management of risks and capacity building within the banking sector.

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    Heeding the shift, RBI’s paper indicates interest in understanding the degree of physical and transition risks. While at the same time it reflects that RBI prefers to tread carefully by assessing the preparedness of the system rather than indicate its own approach to what a central bank can do. The RBI’s approach is reasoned since acknowledgement of risks is a double-edged sword. Not recognising the risks hints at complacency whereas preempting all such risks through regulation means that the already stressed loan books will be aggravated. The paper, therefore, allows the RBI to respond based on existing practices and a better understanding of the risk profiles of banks.

    Also Read |India may lose 3-10% GDP annually by 2100 due to climate change, says report

    RBI’s past research papers also indicate a growing acknowledgement of risks to the financial system. In 2021, an RBI research paper demonstrated that extreme weather events can elevate inflation — as was demonstrated by wheat prices this year. In 2022, RBI estimated the exposure of Indian banks to green transition. The report found that direct exposure of public and private banks to three fossil fuel-based sectors — electricity, chemicals, and automobiles — may not be “not alarming”. Nevertheless, indirect exposure through other sectors within the fossil fuel value chain must also be closely monitored, given that some already have bad loans.

    Both reports indicate that there is a need for further comprehensive risk assessment to be carried out. To add to this, the risk to public borrowing from declining fossil fuel revenue also needs to be established. While the wheels are turning within RBI, disclosures and risk assessment frameworks are a starting point. It remains to be seen what macro and micro-prudential regulations RBI will introduce. Moreover, the scope of discussion in the paper remains limited and without a general narrative on the central bank’s role. It does not detail the various instruments such as capital requirements for fossil fuel-based lending by banks or credit guidance a central bank can work with to ensure the greening of the financial system.

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    The RBI’s consultation paper shows the bank’s inclination to address risks from climate change. It indicates that regulatory changes are in the offing yet their direction remains unknown. Moreover, it leaves to the imagination if climate change will be a key consideration for monetary policy. A point that needs due consideration is that a full assessment of macro-risks from disinvestment from fossil fuel-based assets requires a clear identification of the horizon for phasing down fossil fuels across sectors. While these are not in the remit of the RBI, it is a precondition for comparability of risk assessment carried out by financial institutions thus forming the basis for regulation. The release of the paper is therefore only the beginning and requires an overall net zero plan for the disclosures to be used objectively.

    स्रोत : indianexpress.com

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