CLIMATE CHANGE
RELATED FINANCIAL RISKS
SUSTAINABLE DEVELOPMENT GOALS
A.Nanda
A.Nanda
Guest
Guest faculty
Faculty, IIBFIIBF
15th December
4th May 20232023
14-Dec-23
Climate risk is real
Annual Report 2022, India Meteorological Department
• 2022 was only the fifth warmest year since 1901
• In the last decade, 2012-2021, 2021was also the warmest on record.
• 11 of the 15 warmest years on record were between 2007 and 2021
• India recorded 756 instances of natural disasters (landslides, storms, earthquakes, floods,
droughts, etc.) since 1900, with a total of 402 and 354 events recorded during 1900-2000 and 2001-
2021 respectively
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Triple Planetary Crisis
The triple planetary crisis refers to the three main interlinked issues
that humanity currently faces:
Climate change,
Pollution
Biodiversity loss.
Each of these issues has its own causes and effects and each issue
needs to be for a viable future on this planet.
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Climate Change
Climate change refers to long-term shifts in
temperatures and weather patterns that in the long run
will completely alter the ecosystems that support life on
the planet.
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"Considering the
damage already
done to the
environment, we
are rapidly
approaching a point
of no return where
nature will dictate
the course.”
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Sector-wise composition of GGE Emission
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The Paris Climate
Agreement 2015
The Paris Agreement is the
first-ever universal, legally
binding global climate change
agreement, adopted at the
Paris climate conference
(COP21) in December 2015
Agreed to avoid dangerous
climate change by limiting
global warming to well below
2°C and pursuing efforts to limit
14-Dec-23 it to 1.5°C.
India’s Commitment to Achieve Caron Neutrality by 2070
(2nd Nov 2021)
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The Sustainable Development Goals (SDGs)
1. The SDGs were set up in 2015 by the United Nations General Assembly
(UN-GA) and cover the period 2015-2030.
2. The 17 SDGs are a collection of global goals designed to be a "shared
blueprint for peace and prosperity for people and the planet, now and
into the future" (UN, 2022).
3. They are focused on ending poverty and hunger, fighting inequality and
tackling climate change, with the broad objective of creating a just and
sustainable society that lives in harmony with nature.
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Climate Related Risk
Climate-related risks refer to the potential risks that may arise from
climate change or from efforts to mitigate climate change, their
related impact, and the economic and financial consequences.
Climate risk affects
Financial Sector
Physical Transition
Risk Risk
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Physical Risk
It refers to the economic costs and financial losses resulting from the
increasing frequency and severity of :
Extreme climate change-related weather events (or extreme weather
events) such as floods, heatwaves, landslides, storms and wildfires (
acute physical risks);
Longer-term gradual shifts of the climate such as changes in
precipitation, extreme weather variability, ocean acidification, and rising
sea levels and average temperatures (chronic physical risks); and
Indirect effects of climate change such as loss of ecosystem services
(e.g., water shortage, degradation of soil quality, or marine ecology)
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Climate change, Dr. Sattar says, “is playing a role in
permafrost degradation.” As it weakens, soil and
snow lose their grip on each other. Avalanches
follow, sometimes causing floods even without a
GLOF, such as those that inundated the state of
Uttarakhand in 2021.
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Heavy rains and landslides
have killed more than 60
people in the northern Indian
states of Himachal Pradesh
and Uttarakhand, as
devastating flooding hits the
region during the monsoon
season
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A Complete Breakdown Of India’s Drought Crisis Affecting
11 States, 266 Districts
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Meanwhile, experts have told this reporter
that climate change was causing the
wettest days to become wetter and hottest
days to become hotter in Odisha.
A few days ago, 26 of the state’s 30
districts faced drought-like
conditions. Paddy saplings wilted due to
less rain.
“Climate change is causing the wettest days
to become wetter and the hottest days to
become hotter,” Jayakrushna Panigrahi, the
secretary of Odisha Environmental Society,
told14-Dec-23
this reporter.
• Ocean acidification is threatening marine ecosystems
and it is the main cause of mass coral bleaching events. It
is estimated that by 2100, this phenomenon could cost
the global economy US$3 trillion a year,
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Transition Risks
It refers to the risks arising from the process of adjustment
towards a low-carbon economy.
Transition Risk
Climate Risk related Emergence of new Change in Sentiment &
policy and regulations technology Behavior of customers
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Transition Risk
1. Climate related mitigation policies could include reduction in
financial valuation or downgrade in credit ratings of businesses
adversely affecting the climate or introduction of subsidies to
encourage the use of energy efficient goods/processes.
2. Technological advances can contribute to energy transition,
increase the use of non- fossil fuels that reduce GHG emissions.
3. Shifts in public sentiment including that of consumers and
investors can affect the economy and financial system.
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Credit Risk
Climate risk drivers can impact household, corporate, or sovereign
income and/or wealth.
Negative effect on Bank’s
Negative effect on a ability to fully recover the
borrower’s ability to repay value of a loan due to fall
and to service debt in the value of any
(the income effect) pledged collateral
(Wealth Effect)
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Credit Risk
Physical risk drivers mainly impact banks’ credit risk indirectly
through their counterparties.
1. Loss to physical capital like factories, building
2. Impaired properties and factories produce less income
3. Potential changes in production, sales and profitability in the
transition towards a low-carbon economy affecting credit
worthiness
4. Increased credit cost due to taxes
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5. Transition to low carbon economy may increase stranded assets
Market Risk
Climate risk drivers can have a significant impact on the value of financial assets.
Specifically, physical and transition risks can alter or reveal new information about
future economic conditions or the value of real or financial assets, resulting in
downward price shocks and an increase in market volatility in traded assets.
Climate risk could also lead to a breakdown in correlations between assets,
reducing the effectiveness of hedges and challenging banks’ abilities to actively
manage their risks.
Transition-related changes in policy, technological advances and investor
sentiment could lead to changes in borrowing costs and an abrupt repricing of
financial assets.
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Liquidity Risk
Climate risk drivers may impact banks’ liquidity risk directly, through
their ability to raise funds or liquidate assets, or indirectly through
customers’ demands for liquidity.
• There may be a sharp increase in precautionary demand for
liquidity by financial institutions, households and corporates
• If households and corporates affected by physical risks need
liquidity to finance recovery and other cash flow needs, they
may withdraw deposits or draw on credit lines.
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Operational and Reputational risk
Disruption in business continuity due to the impact on the
bank’s infrastructure, processes, staff and systems.
In addition, exposure to claims from stakeholders who
have suffered climate related losses and who then seek to
recover those losses.
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Unique Characteristics of Climate Related Risks
i. Its impact is far-reaching in terms of its breadth
ii. Its magnitude is relevant to multiple lines of businesses, sectors, and
geographies.
iii. Although there is a high degree of certainty that some combination of
physical and transition risks will materialise in the future, the exact timing,
outcome and future pathways remain uncertain, and the impacts are
unevenly distributed.
iii. Climate change on account of the concentration of GHG emissions in
the atmosphere above a certain threshold will have irreversible
consequences on our planet.
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Climate Risk Related Opportunities
Efforts to mitigate and adapt to climate change also produce opportunities
for organizations, such as:
1. Adoption of low-emission energy sources,
2. Development of new products and services,
3. Access to new markets, and
4. Building resilience along the supply chain.
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RBI Broad Guidelines of Reserve Bank of India on
Climate Risk Management
All Banks are expected to have
(i) appropriate governance policy
(ii)strategy to address climate change risks and
(iii)risk management structure to effectively manage them from a
micro-prudential perspective
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Some best practices to measure Climate Related Risk
Some best practices to measure Climate Related Risk
1. Climate risk scores or ratings
2. Scenario analysis
3. Stress testing
4. Sensitivity analysis
5. Natural capital analysis
6. Climate value-at-risk
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Risk Monitoring
1. Banks may consider a range of quantitative / qualitative metrics and
tools to monitor their exposure to financial risks arising from
climate change, proportionate to the entity’s size, business
activities and complexity of business operations.
2. In determining the climate-related and environmental risk metrics,
the banks may consider the materiality of the climate-related and
environmental risk factors, and risks of greater materiality may be
prioritized and monitored more closely.
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Risk Management and Mitigation
Banks may carry out substantial measures to mitigate or refrain from climate-related risks
that are not in accordance with their risk appetite. These measures can be developed in
response to the Bank’s own assessment of the climate-related risk concentrations. These
mitigation measures may include:
1. Customers in sectors which are highly vulnerable to emerging climate risk may be
subject to tenor limitations.
2. Customers with real estate collateral that do not meet minimum sustainability criteria
may be subject to a lower loan-to-value limit.
3. Customers for which production is directly dependent on weather conditions may
require taking out insurance against extreme weather events (e.g., seasonal droughts,
floods).
4. Customers in CO2 / GHG intensive industries may require having a sustainable energy
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transition strategy
Climate-related disclosure framework
1. Climate-related disclosure is an important source of information for
different stakeholders (e.g., customers, depositors, investors, and
regulators) of banks to understand relevant risks faced by it and its
approach to addressing such issues.
2. Among the various disclosure frameworks concerning climate and
sustainability, the most prominent one is Task Force on Climate-
related Financial Disclosures (TCFD). TCFD recommendations, as such,
may therefore be considered as a desirable framework by the banks to
rely upon, at least at the initial stage.
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The role of banks in supporting the SDG agenda
• Accelerating transition to an
environmentally sustainable economy
through financial products and
services
• Aligning financing with environmental
and social priorities
• Engaging with clients and customers
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Green Banking
Green Banking is an umbrella term referring to practices and guidelines that
make banks sustainable in economic, environment, and social dimensions.
Greening Infrastructure: Making IT infrastructure (including data center)
and physical infrastructure (including buildings) greener and taking initiatives
so that a bank could itself generate electricity for its own consumption.
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Green Financing
“Green finance” means lending to and/or investing in the
activities/projects that contributes to climate risk mitigation, climate
adaptation and resilience, and other climate-related or environmental
objectives - including biodiversity management and nature-based
solutions;
Green Deposit
“Green deposit” means an interest-bearing deposit, received by the
RE for a fixed period and the proceeds of which are earmarked for
being allocated towards green finance;
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Renewable energy- Priority Sector
As part of the green finance initiative, the Reserve Bank has
included the small renewable energy sector under its Priority Sector
Lending (PSL) scheme in 2015.
Green bonds
Green bonds are the bonds issued by any sovereign entity, inter-
governmental groups or alliances and corporates with the aim that
the proceeds of the bonds are utilised for projects classified as
environmentally sustainable. India started issuing green bonds since
2015.
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Green Housing Loan
People are becoming more conscious of the impact their homes have on the
environment and are actively seeking ways to reduce their carbon footprints.
This shift in mindset has led to an increasing demand for green home loans in
India.
One of such initiative is taken up by banks of India to finance GREEN HOME
LOAN, and SBI was the first bank to support the cause of green building
through offering home loan at lower rate of interest.
What is a green building?
Green buildings are those which have implemented strategies to enhance the
efficiency of buildings and minimize their impact on the environment and human
well-being.
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Green Car Loan
The largest public sector bank, the State Bank of India (SBI) encourages
people to apply for EVs through their Green Car Loan scheme for
reducing their carbon footprint.
India encourages citizens to opt for electric vehicles. The government
aims for becoming a 100% electric vehicle nation by 2030, and many key
initiatives have been announced accordingly. Banks too have taken
measures to motivate buying EVs by offering attractive loans. The largest
public sector bank, the State Bank of India (SBI) encourages people to
apply for EVs through their Green Car Loan scheme for reducing their
carbon footprint.
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Barriers to change
1. Greenwashing 2. Conflicting sustainability 3. Short-termism 4. Failure to address
choices 'externalities'
The provision of Excessive focus on
misleading information When pursuing the climate short-term results at the Externalities are the cost of
about sustainable and agenda, some decision are expense of long-term producing or consuming
responsible strategies traded-off or compromised. interests something that is passed on to
For example, something that a third party, but where the
may be deemed better for cost of doing so has not been
the environment may have a considered or incorporated into
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negative impact elsewhere the final cost
Thanks
ambarishananda25@gmail.com
Mob 9831562357
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