Network for Greening the Financial System (NGFS)

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    Recently, the Reserve Bank of India (RBI) has joined the Network for Greening the Financial System (NGFS).

    Highlights of the Move

    • RBI will share best practices and contribute to the development of environment and climate risk management in the financial sector to mobilise mainstream finance to support the transition towards a sustainable economy.
    • It has noted the importance of climate-related financial disclosures and private green finance as necessary to generate enormous amounts of investments.
    • Related Concerns
      • A World Bank report estimates that losses to India’s Gross Domestic Product (GDP) by 2050 due to climate change could be USD 1,178 billion.
      • Most of the Indian companies lag in the climate change disclosure space due to lack of relevant expertise, limited access to relevant tools and methodologies and limited subject knowledge.
    • Steps Taken by India
      • About 32 Indian organisations have signed up for the Task Force on Climate-related Financial Disclosures (TFCD).
        • TFCD is the most important international initiative to make the private sector contribute to climate positive action and become resilient to climate risks.
        • Its recommendations are recognised as the gold standard for global business sustainability reporting frameworks, providing standardised and comprehensive guidelines for corporate climate disclosures.
      • India is promoting local innovations schemes for solar and energy storage.
        • For example, Development of Solar Parks, Grid Connected Solar Rooftop Programme, Pradhan Mantri Kisan Urja Suraksha evam Utthan Mahabhiyan (PM-KUSUM), Atal Jyoti Yojana, etc.
    • Suggestions
      • The Indian government needs to introduce guidelines and regulations to standardise and mandate climate-related disclosures in all financial statements and push private companies and financial institutions to manage their exposure to climate risks in their portfolios and operations.
      • This will increase resilience of Indian companies to face physical and transition risks of climate change but also in facilitate greater climate finance flows while minimising ‘greenwashing’.

    Climate Change and Financial Sector

    • Climate change is a long-term change in the average weather patterns that have come to define Earth’s local, regional and global climates.
      • These changes have a broad range of observed effects that are synonymous with the term.
    • The World Economic Forum’s (WEF) Global Risks Report 2021 noted climate action failure and infectious diseases as the highest risks (risks with greatest impact and likelihood).
      • Risk perception of climate action failure has remained unchanged and infectious diseases remained lower on the scale in earlier editions, until Covid-19 pandemic changed it significantly.
      • Both the climate change and the pandemic impacts are likely to play out disproportionately across countries, exacerbated by long-existing inequalities.
    • Initially, the WEF projected that by 2020, about USD 5 trillion will be needed to be invested annually in green infrastructure, far exceeding the older floor commitment of USD 100 billion annually.
    • The report of the Independent Expert Group on Climate Finance published in December 2020 underscored the urgency of fulfilling the USD 100 billion commitment.
      • It suggested public contributors of climate finance including bi-lateral, multilateral climate funds, multilateral development banks and development finance institutions but also to leverage far greater private finance.
    • Challenges
      • The report highlighted four key deficiencies that include
        • Low levels and declining share of grant finance.
        • Underfunding of adaptation.
        • Lack of adequate finance for least developed countries and small island developing states.
        • Obstacles to expeditious access by developing countries to climate finance.
      • Current climate finance system for developing countries is inadequate.
      • Risks to Financial Stability
        • Physical risks like extreme and slow onset weather events.
        • Transition risks caused by changes in policy, legal and regulatory frameworks, consumer preferences and technological development while transitioning to a low-carbon economy.
      • A lack of clarity about true exposures to specific climate risks for physical and financial assets, coupled with uncertainty about the size and timing of these risks, creates major vulnerabilities.
    • Suggestion
      • The only way forward is to fully integrate climate-aligned structural change with economic recovery needing a fundamental shift in the entire finance system with a massive increase in private finance.
      • It notes that every financial decision should take climate risk into account and climate finance is integral to the transformation process.
      • To create climate positive actions, the starting point is to make the p
      • Private sector should be made accountable for systemic risks and requires to alter processes such that their investments do not (at the very least) exacerbate climate change.
      • Climate action in the private sector will need to focus on and developing three key areas progressively
        • Building reporting and disclosure frameworks that assess whether companies’ actions that cause negative externalities are mitigated.
        • Increasing alignment with United Nations sustainable development goals (SDGs) to create positive impact.
        • Increasing alignment with decarbonisation pathways according to the 21st Conference of Parties (COP) or the Paris agreement to recognise the pace of change required.
      • Substantial amount of finance will also be needed to mitigate transition risks of private companies, including in developing countries including India, that arise from the process of adjustment towards a greener economy.
      • Jobs will need to shift towards a climate-neutral and clean technology dominated economy including renewable energy, energy efficiency, energy storage and decarbonising transport, industry.

    Network for Greening the Financial System

    • It is a voluntary group of 62 central banks.
    • It was established at the Paris “One Planet Summit” in December 2017 by eight central banks and supervisors.
    • Purpose
      • To help strengthen the global response required to meet the goals of the Paris agreement
      • To enhance the role of the financial system to manage risks.
      • To mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.
    • It defines and promotes best practices to be implemented within and outside of the Membership of the NGFS and conducts or commissions analytical work on green finance.
    • As of April 2021, the NGFS consists of 90 members and 13 observers.

    Source: DTE