Through 2030, India would need an additional yearly investment in green financing of at least 2.5% of GDP. According to a Reserve Bank of India (RBI) report, this is done to close the infrastructure gap for targets related to combating climate change.
In addition to greater banks capital requirements, the RBI stated in its report on Currency and Finance (RCF) FY23 that a successful green transition strategy will necessitate a sizable investment in socio-economic infrastructure.
These projections don’t specifically account for any investment needed for climate change adaptation and mitigation. Therefore, the actual funding needs will probably be greater.
The difference between the level of infrastructure as it is now and the level that could have been attained in the absence of climate catastrophes is roughly 5.2% of GDP.
Numerous projections made by numerous institutions indicate that, on the low end, India’s total financing needs could range from 5 to 6 percent of its annual GDP.
Adjusting operations and business strategies to support the green transition process is a twin issue for the banking sector. Additionally, it will increase resilience to the increasing vulnerability of unfavourable climate events to protect financial stability.
With the financial system to properly contribute to the nation’s net-zero aim, it may be necessary to both mobilise sufficient resources and reallocate existing resources.
According to the RBI research, a climatic stress test shows that public sector banks (PSBs) may be more sensitive than private banks in India when it comes to banking group’s susceptibility.
However, measuring financial risks associated with climate change is still a work in progress on a global scale.
Despite growing awareness of climate threats and their potential influence on the financial stability of organisations, a survey of stakeholders revealed that risk mitigation plans are still mostly in the discussion stage.
In order to determine the pathways via which climatic shocks are transmitted to the financial sector, RBI has engaged in modelling. This is adjusted to Indian standards. The simulation’s findings show that climate disasters may cause capital stock to be destroyed, which may affect output and consumption.
Inflation’s negative effect may also cause interest rates to rise, magnifying the original effect on capital stock.