rajeshwar rao : mitigating climate change risks and fostering a robust ecosystem for sustainable finance keynote address by mr rajeshwar rao, deputy governor of the reserve bank of india, at the international conference, organised by the institute of south asian studies ( isas ) at the national university of singapore ( nus ), new delhi, 29 november 2024. * * * distinguished guests, ladies, and gentlemen, good morning. let me, at the outset, thank the organisers for inviting me here to share my thoughts on climate change, one of the most critical issues we face, not just as individuals, but as the collective global community. as per the latest report from the copernicus climate change service's1, the year 2024 will be the warmest year in the era5 reanalysis dataset, going back to 1940. this was also estimated to be the second - warmest october globally, after october 2023 with the average temperatures 1. 65ºc above the pre - industrial level while also marking it the 15th month in a 16 - month period where average temperatures were above the 1. 5ºc threshold set by the paris agreement. thus, the writing on the wall seems to tell us that unless we collectively take strong action, a grim future lies ahead. the recent tragic events, be it in valencia, spain, wayanad, kerala, or back - to - back hurricanes in usa, are stark reminders of the perils of climate change that the world at large is exposed to. it impacts our day - to - day lives in one form or other be it through heavy rainfall, flash floods, cyclones, droughts, melting of glaciers, loss of biodiversity, etc., and that too with increased frequency and severity. there can be no doubt therefore that climate change is going to be a major risk for the financial system, economy, and society at large with risks of severe catastrophic events putting at stake our very survival. the financial system not only needs to brace up and equip itself to the present and future impacts arising from climate change, but should also play a catalytic role by overcoming the consequent challenges that arise. the biggest challenge faced by us and the emerging markets and developing economies is lack of adequate financing for development of sustainable technologies and requisite infrastructure to mitigate and adapt to climate change and build a robust sustainable financial system. india looks to be particularly vulnerable to climate change given its geographic location. it is estimated

that by the year 2100, climate change could lead to an annual gdp loss of 3 % to 10 % 2. climate change risks and its impact on the financial system there are essentially two types of risks emanating from climate change that we need to address : physical, and transition risks. an important consideration in this regard is also adaptation and related risks and measures. let me delve a little bit into detail. physical risks stem from both gradual and sudden climate impacts, such as natural disasters, affecting real assets and financial instruments. these risks cause direct damage to assets, leading to loan losses and collateral damage, as well as indirect costs, including business disruptions, capital replacement, and supply chain issues. 1 / 6 bis - central bankers'speeches these risks can affect trade, fiscal policy, monetary policy, and financial stability, requiring ongoing assessment. estimating loan losses from physical risks is difficult due to lack of historical data on such losses, as financial institutions have not tracked them. even the available data is of limited use due to the changing frequency, intensity, and location of physical events making projections based on past data a bit risky. such data on loan losses is important for financial institutions as they impact credit risk, including the probability of default and loss given default. transition risks arise from efforts to mitigate climate change. it arises from the need for transition by the firms and economies as they strive to achieve their net zero targets, which can be disruptive. it could be a result of adaptation to low carbon technologies, as well as change in consumer behaviour, investor preferences about investments to specific sectors. it can also be a fall out of climate related regulations such as carbon pricing and taxes, transparency requirements, products, and service regulations. thus, the transition risk emerges because of a disconnect arising from the expectations of various economic factors and could lead to rapid economic adjustment costs in a broad range of sectors. it creates uncertainty for firms and investors, which may further lead to financial risks, with its resultant impact on financial stability. while transitioning is crucial, we cannot overlook the immediate impact of climate events which means that we also need to look at adaptation measures which currently appears to be a missing link as far as climate strategies are concerned. 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 shortterm shocks like