By The Reserve Bank of India (RBI) is on the verge of finalizing climate risk disclosure guidelines for financial institutions, alongside a framework for climate scenario analysis and stress testing, RBI Governor Sanjay Malhotra announced on Thursday.
Highlighting the need for a structured approach to climate financing, Malhotra suggested that regulated entities should establish a shared repository of viable projects to facilitate investments in climate-related initiatives.
“One of the key barriers to effective climate finance has been the shortage of financially viable projects. A centralized pool of such projects will offer substantial advantages for the entire financial ecosystem,” Malhotra stated.
Institutions with expertise in green projects can contribute to this initiative, benefiting from shared knowledge while also aiding others in financing sustainable ventures, he added.
Need for a Collaborative Approach
Malhotra underscored that climate change risks extend beyond the financial sector, affecting industries, small businesses, and agriculture. He stressed the necessity for collaboration between financial regulators, government agencies, and lending institutions to create a unified strategy.
“Our short-term objective is to accurately assess the impact of climate risks, not just at the institutional level, but across the financial system as a whole,” he said at a policy seminar on Climate Change Risks and Finance hosted by the RBI in New Delhi.
To achieve this, RBI plans to implement stress testing and scenario analysis models, using both top-down and bottom-up methodologies.
Building Technical Capacity for Green Financing
Beyond creating a structured investment pool, Malhotra urged financial institutions to enhance their technical expertise in evaluating risks associated with green projects. Given the crucial role of technology and finance in India’s transition to a low-carbon economy, he called for greater innovation in climate-friendly financial solutions.
As part of its proactive measures, RBI will introduce a dedicated “on-tap” cohort under its Regulatory Sandbox initiative, focusing on climate risks and sustainable finance. Additionally, the central bank is planning a special “Greenathon” to explore solutions related to climate finance.
Finalizing Climate Risk Guidelines
In February 2024, RBI issued draft guidelines on climate risk disclosures, inviting feedback from stakeholders. The proposed framework requires regulated entities to outline their governance mechanisms, risk assessment strategies, and mitigation plans for climate-related financial risks.
Malhotra confirmed that the RBI is in the final stages of revising these guidelines based on the responses received. A guidance document for climate risk analysis and stress testing is also in development to assist financial institutions in managing their exposure.
RBI’s Role in Green Finance
The RBI has taken multiple steps to encourage green and sustainable financing. Malhotra pointed out that the central bank has introduced a Green Deposit Framework, allowing banks to channel funds into eco-friendly projects. Additionally, small-scale renewable energy projects have been included under priority sector lending to enhance financing for clean energy solutions.
RBI remains committed to fostering a resilient financial system capable of withstanding future climate-related challenges, Malhotra emphasized.
“We will continue to adopt a consultative approach, working with stakeholders to ensure that financial institutions play an active role in mitigating climate risks while contributing to a sustainable future for India,” he added.
RBI’s Key Climate Action Plans
✅ Assess climate risk impact on both individual institutions and the broader financial system
✅ Introduce stress test frameworks and disclosure norms for financial entities
✅ Encourage the development of a common pool of bankable green projects
✅ Launch Regulatory Sandbox & Greenathon for climate finance solutions
✅ Strengthen green deposit frameworks and expand priority lending to renewable energy
Malhotra concluded by reaffirming RBI’s dedication to collaborating with the government and regulatory bodies to ensure a cohesive and consistent strategy in addressing climate-related financial risks.
“We aim to build a financial sector that not only withstands climate challenges but also actively supports India’s journey toward sustainability and resilience,” he asserted.
