Navigating the Financial Storm: Climate Change Risks and Sustainable Finance

Climate change introduces higher operational costs and asset loss risks, increasing default probabilities for borrowers, warned RBI deputy governor M Rajeshwar Rao. He highlighted the finance sector's balancing act in promoting green finance amidst rising credit risks due to climate change challenges and the need for innovative solutions.

Climate change poses escalating risks and costs for borrowers, potentially leading to higher default rates, according to RBI deputy governor M Rajeshwar Rao. He highlighted the impact of climate risks on financial institutions and the real economy, specifically on credit risk.

Speaking at Credit Summit 2025 organized by the Bharat Climate Forum, Rao emphasized the evolving challenges in promoting green and sustainable finance. The transition to decarbonization and its technologies introduce increased credit risks due to their developmental stages.

Rao outlined the necessity for regulators to balance promoting green finance while managing broader financial stability. To address the challenges of incentivizing green finance, innovative solutions such as derisking mechanisms are needed. Additionally, further efforts in risk management architecture and data expertise are crucial for addressing climate-related financial risks.

(With inputs from agencies.)