Impact of Climate Change on Financial Sector

News: Recently, the Reserve Bank of India (RBI) joined the Network for Greening the Financial System (NGFS). The RBI expects to benefit from the membership of NGFS by learning from and contributing to global efforts on climate finance, which has assumed significance in the context of climate change.

Details:

  • 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 while transitioning to a low-carbon economy.
  • Under many climate projections, climate change leads to a further rise in sea levels and increase in storm surge. These effects, in turn, lead to increased inundation of coastal land parcels, which could either damage existing structures on those parcels, or require investment and adaptation for their continued productive use.
  • As this inundation occurs, the expected value of coastal real estate may decrease—which may, in turn, pose risks to real estate loans, mortgage-backed securities, the profitability of firms using the inundated property, and the finances of state and local governments facing declining property tax revenues and rising remediation costs.
  • The World Economic Forum’s (WEF) Global Risks Report 2021 noted climate action failure and infectious diseases as the highest risks (risks with greatest impact and likelihood).

India’s Situation:

  • A World Bank report estimates that losses to India’s Gross Domestic Product by 2050 due to climate change could be USD 1,178 billion.
  • The RBI has noted the importance of climate-related financial disclosures and private green finance as necessary to generate the enormous amounts of investments required to combat climate change and bring about a transformation towards sustainable and low carbon development.
  • A study by non-profit Shakti Foundation found that an assessment of BSE (Bombay Stock Exchange) 100 companies showcases that most of the Indian companies are lagging in the climate change disclosure space due to lack of relevant expertise; limited access to relevant tools and methodologies; and limited subject knowledge.

Initiatives in this regard:

  • Task Force on Climate-related Financial Disclosures (TFCD) was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
  • To make the private sector contribute to climate positive action and become resilient to climate risks are the recommendations of the TFCD. Its recommendations are now widely recognised as the gold standard for global business sustainability reporting frameworks, providing standardised and comprehensive guidelines for corporate climate disclosures.
  • About 32 Indian organisations have signed up for TFCD, including the Mahindra Group, Wipro etc.
  • Recently, New Zealand became the first country to announce a law that will require financial firms to disclose climate-related risks and opportunities.