India has taken the lead in Financing Green Energy projects

India has taken the lead in providing finance to renewable energy projects by including them in “priority sector lending” to accelerate the country’s transition to a low carbon economy in the fight against climate change. 

Addressing a policy seminar on Climate Change Risks and Finance, RBI Governor Sanjay Malhotra said, “Central Banks in Advanced Economies have traditionally followed an asset neutral approach. Central Banks in emerging markets and developing economies, on the other hand, have adopted directed lending policies to channelise credit to certain sectors of their economies given their individual country circumstances and developmental objectives.

He highlighted that India’s priority sector lending guidelines facilitate credit to be channelled to renewable energy. “We have included finance to small renewable energy projects – solar, biomass based, windmills, micro-hydel plants and non-conventional energy based public utilities viz. street lighting systems, and remote village electrification projects as part of priority sector lending,” Malhotra said.

The RBI Governor pointed out that while the role of the Central Banks in managing risks posed by climate change to the financial system is increasingly being recognised, their role in facilitating the financing of green and sustainable transition has been a matter of debate and has varying dimensions to it.

Malhotra said that as a Central Bank, the Reserve Bank is mindful of its role in addressing and mitigating risks to the financial system from climate change. In this context, endeavour has been to play the role of a facilitator – including supporting capacity building and fostering a conducive regulatory framework for promoting green and sustainable finance.

“One important aspect of green lending for sustainable finance is the higher credit risk due to borrowers’ use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness. Regulated Entities, therefore, need to develop suitable capacity and technical know-how to better appraise risks in financing projects which use such green technologies,” Malhotra said.

He pointed out that climate related financial risk modelling is very important and data intensive. There is limited data available for measuring the financial impact of climate change. To address such constraints, the RBI had in October last year announced the creation of a repository called the Reserve Bank – Climate Risk Information System (RB-CRIS).

“The repository is intended to bridge data gaps by providing standardised datasets. These datasets include hazard data, vulnerability data and exposure data related to physical risk assessment, sectoral transition pathways and carbon emission intensity database related to transition risk assessment. Work on this repository is underway and we expect to launch it later this year, he added.

The RBI Governor also highlighted that technology and finance have a critical role in the transition towards a low-carbon economy. There is a need to build innovative solutions and capabilities in these areas. The Reserve Bank has been encouraging and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives in the Fintech space, he observed.

“We propose to set up a dedicated “on Tap” cohort on climate change risks and sustainable finance under RBI’s Regulatory Sandbox initiative. We are also planning to conduct a special “Greenathon” on climate change and related aspects,” Malhotra said.

He also said that several jurisdictions have started work on the assessment and disclosure of climate related risks. International organisations such as International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) Foundation has released standards on climate related disclosures.

Besides, the Basel Committee on Banking Supervision (BCBS) has released a consultative document on disclosure of climate-related financial risks with a view to integrate climate risk related disclosures under the Pillar III disclosure requirements of the Basel framework, he explained.

“The Reserve Bank has already issued draft guidelines on Disclosure Framework on Climate related Financial risks in February 2024, for public comments. We have received valuable feedback and are in the process of finalising the guidelines. A guidance note on Climate Scenario Analysis and Stress Testing is also being developed for the Regulated Entities,” Malhotra added.