SDG 13: Climate Action | SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Reserve Bank of India (RBI) | Securities and Exchange Board of India (SEBI) | IRDAI | Ministry of Finance
IMF technical manual, Climate Risks: The Role of Financial Regulators and Supervisors, provides a risk-focused, evidence-based roadmap for integrating material climate risks into financial oversight while maintaining core mandates for financial stability and market integrity. The report emphasizes that while supervisors should not directly drive green investments—the role of the private sector—they must incorporate climate risks if they are material to the financial sector’s resilience.
By leveraging existing tools like risk assessments, stress testing, and scenario analysis, regulators can adapt current frameworks to address physical and transition risks without major structural changes.
Key Pillars for Integrating Climate Risks in Supervision
Core Mandate Alignment: Focusing on financial stability and institutional resilience rather than direct green investment promotion.
Leveraging Existing Frameworks: Adapting current risk assessment, stress testing, and disclosure tools to capture climate-related vulnerabilities.
High-Quality Data & Collaboration: Improving data consistency and comparability through partnerships between sectoral supervisors, government agencies, and academia.
Sector-Specific Oversight: Setting tailored expectations for governance and risk management in banking, insurance, and securities markets.
Emerging Market Prioritization: Focusing resources on building strong foundational regulatory frameworks before incorporating complex climate-related aspects.
What are “Material Climate Risks”? Material climate risks refer to environmental vulnerabilities—such as physical risks from natural disasters or transition risks from the shift to a low-carbon economy—that have a significant enough impact to threaten a financial institution’s solvency or the overall stability of the market. For example, in India, flooding and extreme heat can directly impair the ability of borrowers in the agriculture and infrastructure sectors to repay loans, thereby creating a material credit risk for banks. Supervisors must assess these risks through evidence-based analysis to determine whether they require specific regulatory interventions or increased capital buffers.
Policy Relevance
For India, the IMF guidelines represent a transition from “Reactive Disaster Response” to “Proactive Financial Resilience,” ensuring that climate-related shocks do not destabilize the world’s fastest-growing major economy. The report’s approach is particularly critical for emerging markets like India, where extreme weather events and flooding pose significant threats to the banking and insurance sectors, necessitating a prioritized focus on data quality, capacity building, and alignment with global standards like those from the Basel Committee and ISSB.
Standardizing “Risk-Based Green Supervision”: Aligning with Basel and ISSB standards ensures that Indian financial products are viewed as credible and trustworthy by global institutional investors.
Bypassing the Greenwashing Gap: Implementing rigorous disclosure requirements in securities markets allows India to bypass the reputational risks of greenwashing as it scales its green bond market.
Operationalizing Resilience in Banking: Requiring banks to use scenario analysis for lending to agriculture and infrastructure allows India to safeguard the ~8% GDP growth from climate-induced financial contagion.
Federal Capacity Building: Focusing on foundational regulatory strength before complex climate integration ensures that India’s resource-constrained supervisors maintain “Implementation Fidelity” in their core duties.
Follow the full report here: Climate Risks The Role of Financial Regulators and Supervisors