Rajeshwar Rao: Climate change - the emerging challenge
Remarks by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the J
P Morgan India Leadership Series Lecture, Mumbai, 19 July 2024.
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Good afternoon ladies and gentlemen,
At the outset, let me thank the organisers for inviting me to deliver this address and
convey my thoughts at this prestigious event. We, as central bankers, interact with
various stakeholders on different occasions and diverse gatherings like this provide us
an opportunity to reflect on issues which straddle not just the world of finance but also
impinges on wider scheme of things. The idea is to flag issues which have wider
ramifications beyond the conventional financial risks. Therefore, while I would dwell
upon the Indian financial outlook, I would like to avail of this opportunity also to discuss
on the issue of climate change and the role of financial entities in the transition process
towards a more sustainable growth.
Indian banking and financial sector outlook
The global financial system is facing strong headwinds from various quarters, including
high levels of public debt, stretched asset valuations, economic and financial
fragmentation, geopolitical tensions, and risks arising from increasing cyber threats.
Amidst these global challenges, the Indian economy is an outlier which shows strong
macroeconomic fundamentals. Economic activity is growing steadily, supported by a
financial system that looks stronger than in the past.
If we exclude post-COVID rebound in 2021-22, India's real GDP growth in 2023-24
surged to its highest since 2016-17, surpassing expectations. The period marked a shift
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in growth trajectory from an average of 7 per cent pre-2020 to an average of 8 per cent
or higher during the subsequent period, driven largely by domestic factors. Inflation is
currently forecast to average around 4.5 per cent in 2024-25 and 4.1 per cent in 2025-26
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. These macroeconomic conditions could, therefore, lay the foundation for sustainable
future growth, improve consumption conditions, strengthen the investment climate, and
enhance external competitiveness.
The Indian banking sector, in particular, has demonstrated significant improvement in
key metrics such as capital adequacy, asset quality, and profitability, supported by
robust macroeconomic fundamentals and business confidence. There has been
sustained growth in credit expansion, primarily driven by personal loans and loans to
services sector. As of the end of March 2024, scheduled commercial banks (SCBs)
reported a capital to risk-weighted assets ratio (CRAR) of 16.8 per cent and a common
equity tier 1 (CET1) ratio of 13.9 per cent. Additionally, SCBs achieved a multi-year low
in their gross non-performing assets (GNPA) ratio at 2.8 per cent and net
nonperforming assets (NNPA) ratio at 0.6 per cent, underscoring strong performance
across various indicators. Profitability of banks also remained strong, evidenced by their
Return on Equity (RoE) at 13.8 per cent and Return on Assets (RoA) at 1.3 per cent as
of March 31, 2024.
At an aggregated level, Non-banking financial companies (NBFCs) also continue to
maintain robust health indicators as of end-March 2024, with a CRAR of 26.6 per cent,
GNPA ratio at 4.0 percent, and RoA at 3.3 per cent.
However, despite the financial system exhibiting strong performance and healthy
financials, as a regulator and supervisor, we need to remain vigilant to the risks on the
horizons. We have been flagging our concerns on strong credit growth in certain
segments of unsecured retail loans. Increase in use of technology has also increased
threat of cyber risks. We have also been sensitising regulated entities on these issues
during our periodic interactions. The regulatory thrust also continues on conduct related
matters to enhance transparency and improve customer experience.
Climate risks and the leadership challenge
But let me now focus on an area which is going to significantly impact us going forward,
which is the issue of climate change and its impact on our economy and the financial
system. These changes transcends segmental, geographical and ideological
boundaries. As leaders you have to take a strategic view and take a long term
perspective. More importantly, you must provide the necessary inspiration, conviction
and guidance on the path to achieve sustainable growth outcomes while being mindful
of emerging challenges. Tackling the issue of climate demands such a visionary
leadership from the collective diaspora of leaders as individuals efforts are likely to fall
short or may prove ineffective.
The current times present us several leadership challenges - in fact, the term
'polycrisis' has come to represent the intertwined challenges from climate, geopolitics,
etc. Amongst all these issues, the issue of climate change is all pervasive and is most
likely test the leadership ability in every sphere of our lives -financial, social and global.
The impacts of climate change may cause damage to lives and livelihoods for several
communities and a challenge of this magnitude demands a cohesive and extraordinary
response from the leaders in every field.
However, I would limit my remarks today to the financial aspects of the climate
challenge and why financial community should play a major role in tackling the impact
of climate change. While the obvious risks of climate change relate to the physical
world, such risks have the potential to swiftly transcend from physical to financial,
bringing into focus the role of the financial sector. At times, there is a debate regarding
role of financial sector regulators, especially central banks vis-à-vis issues on climate
front. I, for one, do believe that there are clear linkages of climate events on growth and
inflation - the two macro variables which most of the central banks are deeply
concerned about. Since the climate events impact the real sector and by extension
bank's exposure to these sectors, it has a direct bearing on risk management
frameworks for banks and other financial institutions. Therefore, from both monetary
policy as well as prudential policy perspectives, central banks will have a key role to
play on the issues related to climate risks. As climate change has the potential to create
shocks to monetary stability, growth, financial stability, and the safety and soundness of
regulated entities, in a way it influences the action of central banks and regulators.
From an Indian perspective, our diverse topography, with snow-clad mountains, fertile
plains, deserts and a long coastline with different temperature and precipitation
patterns, generates diverse set of risks with attendant challenges for growth and
inflation. The agricultural sector, heavily reliant on monsoon rains, plays a critical role in
India's economy and food security. The El Niño event of 2023-24 exemplifies this
vulnerability, leading to hotter summers, reduced productivity, inadequate monsoons
affecting reservoir levels, and lower agricultural production. These factors have
cascading effect on inflation due to food price fluctuations. An added element is the
dependence on agriculture which has bearing on their spending patterns and resultantly
impact growth of country at large. Climate-related events also adversely impact the
credit quality and loan-repayment capabilities of the borrowers. They can wipe out the
assets created from institutional finance thereby impacting health of financial institutions.
An important point to ponder is that the traditional ways of risk management, viz., risk
avoidance, risk mitigation, risk sharing and risk transfer may not be fully effective as the
financial and other risks from climate change wouldn't materialise in part or on
individual basis but manifest and impact collectively in a region or industry. Traditional
instruments like insurance alone may not be enough to manage the risks arising from
such an all-encompassing crystallisation of risks and can overwhelm the insurers.
Therefore, we have to acknowledge that risk emanating from climate change cannot be
handled by one set of actors alone. It needs a buy in from all stakeholders and to
ensure a successful transition to a sustainable future, we need a multi-faceted
approach that involves governments, private sector entities, financial institutions, civil
society organisations and the public.
Climate vs Growth - Concept of 'Just Transition'
Proposals for tackling climate change and containing global temperature sometimes
give rise to contradictory views as pro-climate actions are perceived to compromise on
economic growth and employment. However, the need to act is immediate and in a
calibrated manner. We cannot afford to procrastinate. The rising temperatures and
climate events are already inflicting huge financial costs and causing irreparable
damage to ecosystem. If we start early, the cost of transitioning to a more sustainable
future would be lower and spread out over a longer time horizon.
Therefore, I believe that early work on mitigating the climate risk would support the
longterm growth. The investments in climate action would pay-off well in the medium and
long-term. The important point here is that the short-term impacts should not be
disproportionate to some countries in the sense that they should not be worse-off during
the transition process. Therefore, there is a need for more channelising of climate
finance to EMDEs and firm and abiding commitments on climate funds from advanced
economies to help EMDEs in the transition process is very important.
Adaptation and transition are key strategies in managing climate risks. However, the
transition must be swift, equitable and just, without putting undue burden on developing
and underdeveloped economies. We also need to address the elephant in the room
which is how to finance the transition towards a low carbon economy. Given the
significant funding gaps and huge financing requirements of EMDEs (estimates range
from 2.5 per cent of GDP annually in case of India and at $2 trillion per year by 2030 for
EMDEs) access to transition finance is important.
EMDEs face significant challenges in that they are not just more vulnerable to impact of
climate change but they have even higher resource constraints with predominance of
small enterprises and dependencies on fossil fuels. The recently released publication
by the NGFS titled "Tailoring Transition Plans: Considerations for EMDEs" aptly
highlights the specific challenges faced by developing countries. Though the concept of
'Just Transition' has gained prominence in climate policies of various jurisdictions it's
important that we need to apply it to the transition processes.
Given the need for transition finance, the next obvious question is how to plan for it and
hence a need for credible transition plans. Despite the need for banks and financial
institutions to address multiplicity of objectives, the importance of transition plan in
EMDEs is very important wherein the banks and financial institutions as also
nonfinancial firms have an important role to play. Transition plans are essential for banks
and financial institutions to mobilize capital and manage financial risks that may arise
from climate related financial risks.
The transition plans must be strategic and top-driven while having explicit components
for geographical regions as also for industry and entity levels. Further, entities need to
craft detailed plans across operations, products, services, and policies to mitigate
specific risks. Similarly, industry-specific transition plans should align with sector needs
by meeting regulations, adopting relevant technologies, and collaborating with
stakeholders. This approach would ensure that both entities and industries contribute
effectively while addressing their own set of distinct challenges.
While transitioning is crucial, we cannot overlook the immediate impacts of climate
events. There is, therefore a need to look at adaptation part which is a missing link as
far as climate strategies that are evolving. Adaptation involves responding to climate
event impacts, which steadily deteriorate the environmental conditions essential for
daily living, such as access to water, energy, air quality, and tolerable working
temperatures. These conditions can be disrupted by short-term shocks like storms,
floods, and wildfires, which have abrupt and devastating effects. Establishing early
warning systems and disaster preparedness plans is crucial for minimizing loss and
damage and therefore, adaptation financing is critical for building economic resilience
and fostering sustainable development. One way to do that is by integrating the
adaptation financing into resilience and disaster management frameworks.
The role of regulators becomes important as they not only set the regulations for the
financial sector but also send the signals to the real sector for their future course of
actions, significantly influencing them to chart their future strategies. Also, given the
important role played in financing by private sources, there is a need for regulators to
put in place right climate information architecture to create a conducive environment to
attract private capital for climate finance. Therefore, the role of disclosure frameworks
which are consistent with internationally accepted norms is crucial.
The point I wish to make is that it is possible to converge the objectives of growth and
climate-protection in an optimal way. Once we are able to put in place enabling
frameworks, economy would be able to create a pipeline of the viable projects as well
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as evolve a set of new financial instruments like adaptation finance , blended finance
as an innovative climate financing tools. Given these building blocks the possible policy
direction points to strengthening regulatory and supervisory frameworks could include-
(i) disclosure requirements (ii) risk management (iii) robust network of third-party
verification of green credentials and impact assessment of projects to address green
washing concerns and (v) periodical stress testing as part of risk mitigation measures.
As a country, India too has made significant advancements in addressing climate
change and fostering sustainable development. We have submitted our Nationally
Determined Contributions (NDCs) to the UNFCCC in 2015, with updates presented at
COP 26 in 2021. India also has committed to ambitious targets through its
comprehensive strategy known as "Panchamrit," aiming to increase non-fossil-fuel
energy capacity to 500 GW by 2030, derive 50% of energy from renewable sources,
and reduce GDP carbon intensity by 45% by 2030, aiming for net zero emissions by
2070. Launching of long-term low emission development strategies (LT-LEDS) at
COP27, co-founding the International Solar Alliance, launching of the National
Hydrogen Mission, introduction of Mission LiFE (Lifestyle for the Environment) are
some of the other steps taken by the Government of India.
RBI too has taken proactive steps like including financing renewable energy projects
under priority sector loans, introducing green deposits, and drafting a disclosure
framework for climate-related financial risks. In near future, we plan to release guidance
notes on scenario analysis, stress testing, and effective management of climate-related
financial risks based on BCBS principles. RBI's aspirational goals for RBI@1005
includes establishing a robust regulatory and supervisory framework to effectively
manage challenges arising from climate change, enhance the resilience of payment
systems against climate risks, and collaboration with the government for finalizing a
comprehensive taxonomy.
Conclusion
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India has achieved the highest climate change performance index (CCPI) score
among G20 members in 2024, which reflects our unwavering commitment to this cause.
This also shows that by aligning economic policies with climate action, we can spur
green investments, enhance energy efficiency, and foster sustainable development
across the sectors. By embracing the concept of "just transition" at a global level, we
can chart a course towards a sustainable future - one that ensures prosperity for all
while safeguarding our planet for future generations. Economic growth pursued in a
sustainable way, while treating the whole world as a family and the Earth as its only
habitat, can simultaneously address the challenges of climate change. Here, it would be
pertinent to quote the great vision from the Rigveda, which we propagated during our
G20 presidency:
"
"
"This is mine, that is yours-thus calculate the minds of narrow-hearted people. For the
magnanimous ones, however, the whole world constitutes but a family."
It is said that you are the creator of your own future. As the leaders in our respective
organisations, let's make each decision count as it is a step towards a shared and
prosperous future and our actions of today will shape the reality of tomorrow. May the
deliberations and discussions during the course of event result in innovative ideas to
achieve the shared objective of a climate sensitive growth.
Thank you. Namskaar!!
Inputs for preparing these remarks were provided by Manoj Kumar Poddar, Pradeep
Kumar, Kavita Gangwal and Rupesh Kanaujiya.
1
RBI Bulletin June 2024, State of Indian Economy
2
Future Readying India's Monetary Policy speech delivered by M D Patra, Deputy
Governor on July 12, 2024
3
Adaptation finance is crucial for enhancing resilience and disaster management
capacities
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New instrument which can help in bridging the interests of public and private capital
5
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58049
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https://ccpi.org/