Prof D Mukherjee
On 28 February 2024, the Reserve Bank of India (RBI) introduced draft guidelines for the ‘Disclosure Framework on Climate-related Financial Risks, 2024’. These guidelines aim to mandate regulated entities (REs) to disclose information on governance, strategy, risk management, and metrics and targets related to climate issues. The RBI recently issued a discussion paper on climate risk and sustainable finance, along with a framework for accepting green deposits. This initiative is part of the RBI and the Government of India’s efforts to integrate climate-related considerations into the financial sector’s compliance framework. The guidelines apply to scheduled commercial banks, tier-IV primary (urban) co-operative banks, All-India Financial Institutions, and top and upper layer non-banking financial companies. Other entities can also voluntarily adhere to these guidelines. The Disclosure Framework aims to streamline climate risk reporting, potentially avoiding duplicative reporting already covered by existing frameworks like the Business Responsibility and Sustainability Report (BRSR) for listed entities. It encourages cross-referencing to avoid redundancy in reporting.
Efforts to increase private climate finance face significant challenges. These challenges include gaps in climate information architecture, resource constraints, coordination issues, and a weak global economy. The lack of accurate data hampers risk assessment, transparency, and accountability needed for effective policy formulation.A robust climate information system is crucial for market confidence and sustainable finance. Improvements are needed in obtaining reliable data, establishing consistent disclosure standards, and agreeing on climate finance taxonomies. Insufficient data on climate conditions, socio-economics, and transition risks hinder decision-making and scaling up climate finance. Investors require accurate data for assessing risks and identifying suitable projects.Data gaps are the main constraint for central banks and financial authorities in imposing broader disclosure requirements. Some countries are in process of developing data repositories and tools for sustainable finance analysis. Aligning with global sustainability disclosure standards is crucial for enhancing climate disclosures. Research studies revealed that most of the economies particularly developing nations lack a functional climate taxonomy,although efforts are underway to develop taxonomies to define sustainable activities.
Inadequate institutional coordination and capacity pose challenges to building climate finance capacity. A clear institutional framework is essential for effective capacity building and reducing duplication. Gaps persist in national institutional frameworks supporting global climate strategies, leading to coordination challenges.Geo-economic fragmentation and volatile energy prices complicate climate action. Supply chains are being splintered, and unilateral actions on carbon pricing could lead to trade tensions. Coordinated global efforts are needed to improve data quality, enhance climate disclosures, develop taxonomies, and strengthen institutional frameworks. Ensuring compatibility and coherence between national and international climate policies is crucial for mobilizing climate finance and achieving sustainable development goals. Foreign investors are always concerned with political stability, transparency and robust legal framework in order to hedge their risk of financial outcomes in real term.
In order to obviate the challenges and make it aworkable solution,India needsa triangular approach involving national governments, central banks and financial sector regulatory authorities and the global monetary and advisory bodies such as International monetary fund since climate financing is an international issue and not confined within the geographical territory of a particular nation. A concerted effort is called for in order to garner the desired outcomes in timebound manner.
Government is also urged to integrate mitigation and adaptation targets into climate finance strategies, emphasizing concrete action plans with clear deliverables, timelines, and stakeholder involvement. Centralized bodies should be established to coordinate climate-related activities, ensuring efficient resource use and avoiding duplication. Mobilizing domestic fiscal resources can be achieved through subsidy reforms and carbon pricing schemes, redirecting revenues to support the green transition and low-income households. To attract private capital, governments should align risk-return trade-offs, consider public-private partnerships, and strengthen infrastructure governance.
Establishing a strong climate information architecture, encompassing finance taxonomies, disclosure standards, and climate-related statistics, is crucial. Climate finance taxonomies should harmonize globally agreed principles, attracting cross-border finance flows. Consistent climate disclosure standards will improve market pricing and inform investment decisions. Timely, reliable data is essential for sound climate-related investment and finance decisions.
Compatibility and coherence with global development in framing strategies is needed on architecting climate labels and climate impact-oriented ESG scores to align investments with climate goals. Regulators should focus on setting clear guidelines and enforcement procedures, concentrating on sustainability and climate impact on the national economy.
The International Monetary Funds (IMF) as a global financial regulatory adviser plays a crucial role in providing informed advice on climate commitments and financing gaps, supporting capacity development in climate-related areas. IMF’s Resilience and Sustainability Trust offers long-term financing to reduce vulnerability to climate-related shocks, mobilizing concessional financing from other sources.It can help any country develop institutional capacity to mainstream climate into macroeconomic frameworks, focusing on financial, fiscal, and statistical sectors and India is of course not an exception. Multilateral institutions should collaborate to facilitate peer-to-peer learning and offer platforms for sharing knowledge and best practices. MDBs should expand lending capacity for climate projects, focusing on a balanced allocation between mitigation and adaptation lending, particularly for low- and middle-income countries.
In addressing the challenges to mobilizing climate finance in a country, it needs to integrate with the concerted efforts at the global, regional, and national levels. Improving data quality, enhancing climate disclosures, and strengthening institutional frameworks are crucial steps. Coherence between national and international climate policies is an essential conditionfor attracting private finance and achieving sustainable development goals.
Despite the challenges, there is a growing recognition of the importance of climate finance, and with coordinated efforts, it is possible to overcome these challenges and accelerate the transition to a low-carbon, sustainable future.Government, central banks, financial sector supervisors need to collaborate to addressing the challenges of climate change. Integrating climate-related policies into governance frameworks, aligning risk-return trade-offs, and enhancing capacity for climate risk analysis are critical steps. Strengthening economic management, developing sustainable financial markets, and promoting investment in climate projects are essential for a sustainable future. This is, of course, a herculean challengeto the Government while framing policies, smooth implementation, ensuring strictcompliance andmeasuring outcomes. Governance professionals like Company Secretaries (CS), Cost & Management Accountants (CMA), and Chartered Accountants (CA)/Certified Public Accountants (CPA) play a crucial role in assisting governments in climate finance mobilization, risk assessment, compliance management, and outcome measurement. These professionals can assist in climate finance mobilization by advising on financial strategies, identifying funding sources, and ensuring compliance with regulatory frameworks. They can conduct risk assessments to identify and mitigate financial, operational, and regulatory risks associated with climate finance initiatives. In terms of compliance management, they can help governments adhere to reporting requirements, tax regulations, and international standards for climate finance. Additionally, governance professionals can assist in outcome measurement by developing key performance indicators (KPIs), monitoring progress, and evaluating the effectiveness of climate finance initiatives. Therefore, Government should involve these professionals from inception so that the initiative in climatefinance could take off and navigate smoothly as the whole process needs due-diligence of the governance.
(The author is a Bangalore based Educationist and Management Scientist)
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