Climate change risks have started to impact the financial system and are envisaged to pose systemic risks in the coming future, according to M Rajeshwar Rao, Deputy Governor, RBI.

The climate-specific vulnerabilities’ interplay with real economy and financial sector vulnerabilities can lead to financial stability risks, he said at the international conference, recently organised by the Institute of South Asian Studies at the National University of Singapore, in New Delhi.

“In this context, it is essential to build capabilities to ensure correct assessment of these risks and put in place suitable adaptation and mitigation measures. Transparency and capacity building are going to be the key differentiators and we need to collectively move in this direction,” Rao said.

Flagging a challenge in augmenting the scope of sustainable finance, the deputy governor said the world and India in specific require considerable amount of funding to achieve the respective net zero targets.

He noted that climate change was a topic of heated debate, particularly about availability of adequate climate related finance, at the recently concluded Conference of Parties (COP) 29 in Baku, Azerbaijan, which highlighted two issues— first, climate related finance still gets negotiated at international forum and second, EMDEs (Emerging Markets and Developing Economies) priorities are still not aligned with the developed nations.

Rao underscored that though the agreement proposed to triple the climate finance for EMDEs from the previous goal of $100 billion to $300 billion annually by 2035, it fell short of EMDEs expectations.

India had committed to the COP26, its Panchamrit goals (Nationally Determined Contributions ). It is estimated that the funding requirement to achieve these targets ranges around $160 billion per year.

Green projects 

Rao said given the fact that, green or sustainable projects are based on relatively newer technologies which are yet to stabilise and are mainstreamed, assessment of financial and techno-economic viability of these projects becomes that much more challenging. This leads to an inherent increased credit risk as compared to traditional projects.

He observed that while bankable projects invariably find credit, there are issues with partially bankable and non-bankable projects, which generally gets associated with adaptation,

Several issues in the form of data, knowledge and capacity gaps, technical, and institutional constraints limit the proper identification and development of adaptation projects which limits the access to both international as well as private finance, he said.

Hence, there is an urgent need to develop an ecosystem to mainstream adaptation finance and to rise above the typical corporate social responsibility linked funding and public investments.

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