Sustainable finance has been the buzzword for the last 4-5 years, especially given the way climate change is taking shape around the world due to deteriorating climate conditions on account of too much of greenhouse gas (GHG) emissions emanating from various commercial, industrial and real estate activities throughout the developed and developing nations.

Climate change has created unprecedented events leading to very high temperatures, heavy rainfalls leading to flooding, melting of glaciers etc. As per the report of the UN's Intergovernmental Panel on Climate Change dated August 9, 2021, the emissions of greenhouse gases (GHGs) from human activities are responsible for 1.1 °C of warming since pre-industrial times 1.

How can climate risk be tackled or mitigated?

One of the ways of mitigating or tackling such climate-related risks is to adopt sustainable and energy-efficient ways to stop or reduce the emission of GHGs. Some of the measures that are adopted are renewable sources of energy like wind, solar, biomass and the creation of green hydrogen.

Globally, such climate and environment-related risks are also recognised by banks and financial institutions as a part of their ‘financial risk’. The way banks come to recognise such ‘climate and environment related risks’ is under their overall ‘risk management framework’, wherein such framework should consider ‘climate and environment’ related risks faced by the borrowers to whom they intend to lend.

This article covers brief features of RBI’s discussion paper on ‘Sustainable Finance and Climate-Related Risk’, global developments around sustainable finance and climate-related risks with a primary focus on international regulatory developments and focus on the role of banks and financial institutions. It concludes by highlighting specific expectations from banks and financial institutions in this area.

Sustainable finance and climate-related risks

What is SF?

Sustainable finance means facilitating financial flows of capital / money to support sustainability goals. Sustainability goals are aimed at meeting the needs of the present without compromising the ability of future generations to meet their own needs.

There are three internationally recognised frameworks that help define sustainability goals:

  1. Paris Agreement - Legally binding international treaty on Climate Change - Dec 2015 (popularly known as COP 21, with its latest edition being the COP 26 held in 2021);
  2. ESG Framework (Environmental, Socially responsible and Governance);
Sustainable Development Goals (adopted by UNDP in 2015 - protection of planet / climate action).

To read more, please subscribe.