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Guest Column

Published on: Dec. 19, 2023, 12:26 p.m.
Building financial resilience
  • The Indian Ocean is warming faster than most other global oceans, leading to climate disasters growing more frequent and deadlier

By Jagjeet Sareen and Anirudh Kishore

United Nations Secretary-General António Guterres’s dramatic declaration that we have now entered the era of ‘global boiling’ is only the latest in a string of warnings about imminent extreme climate events. Yet, we know that some regions are more affected than others. According to an IPCC report from 2021, the Indian Ocean is warming faster than most other global oceans, leading to climate disasters growing more frequent and deadlier. This puts about 2.6 billion people who live in the Indian Ocean Region (IOR) at heightened risk of food shortage, livelihood loss, and displacement.

Globally, there is growing recognition around the need to bridge financing gaps to tackle these threats. Available funds fall short by 5-10 times of what is required, disproportionately affecting Small Island Developing States. A climate-intentional financial sector is required to enable the smooth flow of these funds and drive investments towards climate adaptation efforts, such as restoration of mangroves and promotion of agroforestry.

Carbon-dependent economies, particularly countries in the Indian Ocean region, might find it difficult to build physical resilience without first building financial resilience. Supply chains in the region are dominated by fossil fuels, making them especially susceptible to transition risks, such as lower credit rating for companies, a dip in market valuation, and liabilities in the form of penalties or legal action. According to a working paper by the Asian Development Bank Institute, these countries expected to suffer losses amounting to $1.7 trillion by 2100 due to climate change. Financial resilience can help incentivise the shift to a decarbonised economy, without adversely impacting existing jobs and revenue streams.

How to build financial resilience

Building financial resilience refers to financial institutes creating mechanisms through which they can combat both, physical and transitional risks posed by climate change. However, currently, companies do not have access to reliable and consistent data to even begin assessing the problem at hand. In India itself, around 70 per cent of banks have not attempted to quantify the amount of their portfolio susceptible to climate risk, according to a study by the Reserve Bank of India. In the absence of information, it becomes difficult to define the problem and identify the parameters to work. Access to data can bridge the gap between intention and action, and provide the initial push to greening the sector.

Once financial institutes establish the source and extent of the risks, they need enabling structures to overcome them. Regulation and guidelines can prove effective. The RBI, for instance, published its climate risk management guidelines in 2022 and a more comprehensive framework in 2023. Clear, actionable guidelines such as these provide financial institutions with a starting point to frame internal policies and sets precedence for best practices. Similarly, policy actions such as mandating ESG norms and disclosures can accelerate the switch to climate-smart practices.

Ultimately, information and infrastructure are not enough. Financial institutes need to more holistically integrate the language and nuances of climate change and risk management into internal processes. To do this, it is integral to have a workforce capable of implementing these changes. Capacity building and training programmes ensure that everyone is equipped with the right skills, such as climate risk assessment or reporting, and help embed individual climate commitment across firmwide operations.

  • In India itself, around 70 per cent of banks have not attempted to quantify the amount of their portfolio susceptible to climate risk, according to a study by the Reserve Bank of India

Financial resilience can also aid climate competitiveness 

A climate-resilient financial sector also ties into broader attempts to build climate competitiveness among economies in the region. By lowering the transitional costs of becoming climate-smart, economies gain an edge in an increasingly decarbonised global trade order. The European Union’s Carbon Border Adjustment Mechanism (CBAM), a ‘carbon tax’ levied on per-unit emissions on imports, is one such example. High-carbon export economies, such as India, Bangladesh and the Maldives, stand to benefit from climate-smart financial structures which enable the shift to cleaner supply chains and protect against forthcoming sanctions.

 As each economy works to strengthen its own financial sector, it can set an example and incentivise neighbouring regions to follow suit. Ultimately, it is important to remember that building financial resilience and climate competitiveness is not a zero-sum game. Rather, it enables the region – and the rest of the world – to work together, in a coordinated manner towards a common future.

(Jagjeet Sareen is a Principal at Dalberg Advisors and leads the firm’s climate practice; Anirudh Kishore is a Climate Fellow and an Associate Consultant at Dalberg Advisors)


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