The Discussion Paper on Climate Risk and Sustainable Finance states that the Board of Directors will have an important role to play in identifying climate-related and environmental risks and opportunities and in assessing the actual and potential impact of these risks on RE’s strategies and plans. It also underlined that lenders need to understand and regularly assess current and future financial risks arising from climate change and environmental degradation that may affect them. Comments are invited from regulated entities and other stakeholders on the discussion paper by 30th September, 2022
Lenders may need to include both physical and infection risk assessments in a range of climate-related scenarios. They can identify and simulate plausible and relevant scenarios, factor in the interrelationships between climate-related risk and other risks, and explore resilience to financial losses under different scenarios.
Climate risks can affect the financial sector through two broad channels, physical risks—financial losses arising from climate change-related events, and transition risks—risks arising from the process of adjustment toward a low-carbon economy.
The materialization of physical and infection risks depends on a number of issues that interact with each other in complex ways and are therefore subject to deep uncertainty. “Therefore, it is important for REs to understand the interactions between climate-related and environmental risks and their business activities and the potential impact of such risks through various prudential risk categories including credit risk, market risk, liquidity risk and operational risk. Identify the .
Lenders may also need to incorporate climate-related risks into their processes to account for other risks – including credit concentration risk, underwriting risk, reputational risk, strategic risk, etc. Banks also need to take these risks into account while designing their internal capital adequacy assessment process. The paper states that in addition to adopting appropriate disclosures under Pillar-II (ICAAP) documents under the Master Circular of Basel III Capital Regulations. It has also suggested that lenders may have a committee/sub-committee at the board level consisting of experts in sustainability and risk domains to guide and monitor climate related policies.
As a part of its commitment to lending to green finance, the Reserve Bank seeks to encourage lenders to set a board-approved voluntary financing target to enhance green financing and reduce their use of paper by eliminating their use of paper. Will also consider converting the branches into green branches. their operations
Globally, climate change is increasingly recognized as a source of financial risk for banks. Uncertainty about the timing and severity of climate-related and environmental risks certainly threatens the safety, soundness and resilience of individual regulated entities (REs) and, in turn, the stability of the financial system as a whole. It is therefore recognized that RE should continuously manage the risks and opportunities arising out of climate change and environmental degradation.