Interviewtimes 
As the world comes to terms with the impact of legacy emissions, the pressure to achieve climate-friendly growth mounts. Fiscal and monetary authorities must now be aware of the economic repercussions of climate change and adjust their policy responses accordingly. Asset exposure to extreme weather events and asset depreciation due to a green transition are immediate risks to the financial system.
However, incorporating climate change into a central bank’s policy response function is a widely contentious issue. Some experts see no harm in the bank’s internal assessment of the impact of climate change on the economy, but are reluctant to ask the bank to actively set monetary policy based on such assessments. Others argue that climate change poses a significant threat to financial stability and a central bank that fails to address climate risks is “not doing its job”.
Central banks can direct the flow of finance by restricting the flow of credit to fossil-fuel dependent sectors. Central banks apply a number of best practices and approaches. For example, the Bank of Lebanon sets different reserve requirements for loans associated with energy savings. The People’s Bank of China is offering commercial banks positive incentives for green lending, and India is including renewable energy (RE) lending to priority sectors.
RBI was measured but receptive to addressing concerns. In 2021, she joined the Network for Greening Financial System, a voluntary group of 116 central banks promoting the sharing of green finance best practices. In July 2022, she published a discussion paper dealing with the topic of climate risks and sustainable finance. The paper seeks to understand preferred approaches to identifying and disclosing exposures to climate-related risks, risk management frameworks and capacity building in the banking sector.
