India is one of the most vulnerable countries to the impacts of climate change, ranking 7th out of 181 in the Global Climate Risk Index 2021. More than 75% of Indian districts are hotspots for extreme climate events¹. It is clear that climate change poses a significant threat to India, with one study suggesting that it could shave off 2.5%-4.5% of India’s GDP annually if not tackled timely².

Taking action to mitigate the impacts of climate change and build resilience among communities is of great importance for India to sustain its developmental trajectory while simultaneously tackling climate change. To address climate change and its impact, it is estimated ~ NR 162.5 tn (USD 2.5 trillion) from 2015 to 2030, or roughly INR 11 tn (USD 170 billion) annually will be required. This is also in sync with IFC estimates³ of INR 195 tn (USD 3 trillion) worth of climate investment opportunities in the country from 2018 to 2030. Current investment, according to soon to be published CPI study, is ~ INR 3.09 tn (USD 44 billion) per annum only.

While there has been increased focus on green and sustainable finance and India has seen action from policy makers (Finance Ministry – Dept of Economic Affairs, DEA) and regulators (RBI and SEBI), the market still grapples with problems of limited contextual knowledge, complex calculations, unprecedented areas of growth and limitations of existing investment mechanisms, among others. This is further compounded by information asymmetry, absence of taxonomy for green and sustainable activities and headwinds due to COVID 19 – all of which have led to a limited progression of green and sustainable finance across both banking and capital markets. Some initiatives are now underway at policy and regulation front to address some of these challenges. These include:

• DEA, Ministry of Finance has initiated a Sustainable Finance Task Force to chart out India’s Sustainable Finance Roadmap – this effort entails a Working Group with participation from the Reserve Bank of India, or RBI (Central Bank) and the Securities and Exchange Board of India, or SEBI (Capital Market Regulator)
• The Central Bank – RBI has joined the Network or Greening the Financial System (NGFS) in 2021, an association of central banks of more than 100 member countries; and RBI has also set up its own Sustainable Finance Group.
• SEBI has issued a Consultation paper on Green and ESG ratings⁴ in January 2022 and had defined Green Bonds earlier
• The Govt of India Budget announcement (Feb 2022) signaled India’s willingness to borrow internationally through Sovereign Green Bonds and invest in low carbon/green development of Indian economy.

However, one core area which hasn’t gained requisite prominence as yet is climate risk and its sensitivity to the financial system. Climate risk manifests in two ways:

• Physical Risks cause direct harm to assets or disrupt Industry / company value chains
• Transition Risks arise from the overall shift to a low carbon economy through changes in policy, technology and market sentiment

Both impair asset values and credit quality of loans and investments from banks, financial institutions, and capital markets. Apart from credit quality, climate risks also have an impact on market and operational risks.

Given the above context, this paper aims to look at how climate risks impact financial markets – banking, capital markets, and insurance – and the opportunities this presents for investments and product innovation.

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1 Source: Preparing India for Extreme Climate Events (CEEW 2020)
2 McKinsey Global Institute (2020) – Will India get too hot to work?
3 Source: Climate Investment Opportunities in Emerging Markets An IFC Analysis
4 Source: Consultation Paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets (SEBI 2022)