India’s economy operates within a complex global landscape marked by declining global growth, geopolitical fragility and elevated debt levels. Despite these challenges, the country remains resilient. India’s manufacturing and high-frequency indicators, including robust toll collections and favourable supply chain dynamics, offer a promising outlook. But increasingly volatile weather patterns and other climate-related risks are threatening India’s growth prospects.
The country, especially the agricultural sector, has a high sensitivity to physical risk. In the past year, erratic monsoon patterns have been a key cause for concern. Some effects are already visible – the consumer price index surged to 7.4%, beyond the 2% to 6% target. The Network for Greening the Financial System’s most recent scenarios suggest that India’s gross domestic product could take a hit due to its sensitivity to physical risk.
These inflationary pressures, primarily driven by food and crop prices, demand a proactive response. India’s commitment to reaching net zero by 2070, along with other climate commitments announced at COP26, also highlights the urgency of addressing these risks.
At a roundtable hosted by OMFIF’s Sustainable Policy Institute, representatives from the Reserve Bank of India and the Securities and Exchange Board of India spoke about the G20 host country’s green financial agenda. They examined its economic vulnerabilities to climate change, regulatory initiatives, the need for international co-operation and the path towards a sustainable transition.
Addressing risks through regulations
The RBI and SEBI are working towards a comprehensive regulatory framework. This framework spans both the financial and corporate sectors, focusing on transparency, risk management and sustainability.
On the banking supervision front, the RBI in February 2023 announced guidelines on green deposits, disclosure regulations and scenario analysis and stress testing. The green deposit framework has been effective since June 2023, with the allocation of proceeds raised from green deposits based on the Indian green taxonomy. The representative from the RBI noted during the roundtable that guidance on scenario analysis and stress testing is forthcoming, adding that preliminary climate stress tests have been conducted and will be published in the coming months. On the disclosure framework front, guidelines have been drafted and are pending internal approval.
In January 2023, India released its first tranche of sovereign green bonds worth Inr80bn (approximately $960m). These bonds signify India’s dedication to its nationally determined contribution targets under the 2015 Paris agreement, inviting global and domestic investments in green projects. The funds generated from these bonds will be directed towards public sector projects designed to reduce the carbon intensity of the economy. As interest in green bonds grows among different stakeholders in the country, both the Ministry of Finance and SEBI have their own green bond frameworks. SEBI issued a consultation paper in 2022 on the potential for blue bonds, which also discussed standardising the regime for issuing green-labelled securities.
On the corporate disclosure side, SEBI first released a sustainability report in 2012 and has continued to introduce more climate-related guidelines and regulations over the past decade. The representative from SEBI noted that they conducted their first corporate disclosure exercise under the Business Responsibility and Sustainability Report Core, measuring nine key performance indicators of the top 150 entities over 2023-24. The objective is to have a consistent and reliable regime for investors, which also mitigates risk of greenwashing, to show the green policy of corporates and attract investment.
India’s approach to these regulatory frameworks includes a degree of jurisdictional flexibility. While engaging with global standard-setting bodies like the NGFS, G20, International Sustainability Standards Board and Basel Committee, Indian regulators insist on considering the unique domestic and developmental contexts of emerging markets. This ensures that international standards and frameworks are adapted to the Indian landscape.
Deepening international co-operation
India’s commitment to global alignment on disclosure regulations is evident in its collaboration with countries like the UK and Japan, as well as its active participation in international forums and task forces. At the September G20 summit hosted by India, the main priorities, according to the representative from the RBI, included developing a mechanism for timely and liquid resources for climate change, catalysing green and lower-carbon technologies and scaling up impact investment instruments. Capacity building and addressing data-related barriers were also key issues.
The leaders’ declaration from the summit endorsed the report on macroeconomic risks arising from climate change and transition pathways, underscoring the urgency of addressing challenges at the international level. This endorsement and other sustainability-related measures included in the declaration mark a significant step in furthering international co-operation in actions to mitigate climate change.
India’s journey towards becoming a resilient and sustainable financial system is not without its challenges. It requires continuous collaboration between regulatory bodies, financial institutions and the private sector. Capacity-building initiatives are crucial to ensure that businesses can effectively disclose their sustainability efforts and align with green priorities.
As the nation navigates the challenges of climate change and strives for economic resilience, regulatory frameworks and international co-operation provide a solid foundation for progress. India’s journey towards sustainability is a dynamic and evolving process, guided by flexibility, transparency and the unique needs of its developmental context. In a world where the macroeconomic costs of climate change are increasing, India is taking proactive steps to ensure its financial system is both green and robust.
Arunima Sharan is Senior Research Analyst and Taylor Pearce is Senior Economist at OMFIF.