Steering climate risk: How banks can be future-ready

Many of the sectors that are vulnerable to climate change, such as agriculture, infrastructure, and energy, are heavily dependent on the banking sector for financing. For e.g., in India, scheduled commercial banks are the major players in supplying credit to the agriculture sector followed by rural cooperative banks.

Since climate variability impacts farmers’ incomes and food security significantly, this in turn can materially impact the financial health of the banks that provide credit. Therefore, climate-risk management for banks today is indeed a necessary imperative, as it would enable banks to factor in climate related risks when assessing creditworthiness and also encourage them to tailor financial products and services that reduce credit risks and enhance agriculture resilience.

[...]

The framework’s focus on concepts such as mispricing of assets and misallocation of capital due to climate risks, can fundamentally impact the way banks operate in India. This is a significant step towards bringing seriousness to climate risk management and underscores the urgency of addressing climate related risks for long term resilience of banks and the economy. The underlying purpose of the banking regulator is to eventually leverage the financial services sector as a way to facilitate funding activities that support a greener economy.

[...]

While the draft framework is a step in the right direction towards encouraging transparency and establishing common reporting standards, a lot more needs to be done to enable data integrity along with consistency and comparability across assessments. Collaboration and knowledge sharing among banks, regulators and industry stakeholders needs to be encouraged towards developing standardized methodologies and metrics, that in turn can improve the quality and accuracy of climate risk assessments, while promoting harmonization of assessments.