The recent devastation caused by Hurricane Milton in the United States and a series of extreme weather events (EWEs) closer to home – from landslides and floods in Kerala and Assam to heatwaves in northern India to urban flooding in major Indian cities – highlight the increasing frequency and severity. climate-related disasters. These events highlight the urgent need for robust climate risk management, both globally and nationally. According to Germanwatch’s latest Global Climate Risk Index, India ranks seventh among the world’s most vulnerable countries to climate change.

In this context, the recent Climate Risk Information System (RB-CRIS) initiative of the Reserve Bank of India (RBI) is an important and timely step. The initiative addresses a fundamental challenge in climate risk management: the lack of standardized, high-quality data. The fragmented nature of climate information – with varying sources, formats and indicators – has long been a barrier for financial institutions in quantifying their exposure to climate risks. RB-CRIS seeks to fill this gap by providing a centralized repository of processed and standardized climate data. This initiative aligns with global regulatory trends that emphasize the integration of climate risks into financial supervision and macroprudential policy.

As noted, the RB-CRIS will include two elements: first, a publicly accessible web directory of data sources, including meteorological and geospatial information, and second, a data portal of processed datasets in standardized formats that will be made available to regulated entities. in phases. On the one hand, the open access platform will benefit not only regulated entities but also other stakeholders, including the general public. On the other hand, targeted access to processed data sets will equip financial institutions with the necessary tools to conduct in-depth climate risk assessments.

The implications of RB-CRIS for the Indian banking sector are likely to be profound. Banks exposed to sectors vulnerable to climate change, such as agriculture, infrastructure and energy, face increased credit risks. Access to standardized climate data will improve banks’ ability to perform stress testing and scenario analysis, essential elements of effective risk management. Banks can assess the potential impact of various climate scenarios on their loan portfolios, capital adequacy and overall financial health. This, in turn, will inform strategic decisions regarding lending practices, asset allocation and capital reserves. Institutions that effectively integrate climate risk assessments can gain a competitive advantage by better assessing risks and identifying opportunities for green financing and sustainable investments.

However, the success of RB-CRIS will depend on the response to several political imperatives. Firstly, the effectiveness of this system will essentially depend on the quality and reliability of the data provided. Ensuring data accuracy requires robust methodologies for data collection, processing and verification. There is also the question of interoperability: to what extent will RB-CRIS data integrate with banks’ existing risk management systems? Banks will need to modernize their technology infrastructure to use this data effectively.

Second, the initiative will place a significant burden on Indian banks to develop their capacity to interpret and act on climate data. Many institutions, particularly smaller regional banks, may lack the expertise to translate this information into meaningful risk assessments and strategic decisions. This could lead to a widening gap between large, well-resourced banks and their smaller counterparts, which could exacerbate systemic risks rather than mitigate them. Therefore, concerted efforts will be required to build the capacity of all banking institutions, particularly smaller ones, through targeted training and resource support, ensuring that the entire sector can effectively manage climate risks and contribute to financial stability.

Third, the central bank should provide clear guidelines on how to effectively use RB-CRIS data in forward-looking climate scenario modeling. This is particularly urgent and important in view of the RBI’s indication in its draft disclosure framework that from the next financial year, regulated entities such as scheduled commercial banks will be required to disclose information on the parameters governance, strategy and risk management, in accordance with international standards such as IFRS S2, based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Such guidelines will help banks align their practices with global best practices and regulatory expectations.

Fourth, the government and the RBI should explore ways to leverage this data to formulate policies in risk-prone areas and sectors. For example, the government could provide incentives for climate change adaptation or mitigation actions, such as investing in resilient infrastructure like underground power grids in cyclone-prone regions to reduce the risk of blackouts. Similarly, the RBI could introduce macroprudential measures such as a countercyclical carbon capital buffer, requiring banks to build higher capital during periods of increased carbon-intensive credit exposure, reinforcing thus the robustness of the financial system.

Fifth, there is a risk that RB-CRIS inadvertently encourages a tick-box approach to climate risk management. Banks may focus on strictly complying with any new regulations rather than truly integrating climate considerations into their core business strategies. This could lead to a situation where climate risks are siled within risk departments rather than being treated as a core business issue. To address this potential challenge, the RBI should develop a comprehensive climate risk governance framework requiring board-level oversight, implement climate stress tests that assess the resilience of the business model, and introduce a disclosure regime emphasizing the qualitative aspects of banks’ climate strategies.

Finally, the broader economic impact must be considered. Led by RB-CRIS, as banks adjust their risk assessment models to account for climate change, there could be an uncalibrated shift in lending to carbon-intensive industries. While this supports environmental goals, it raises concerns about the economic transition for sectors and communities that rely on these industries. Policymakers must develop strategies to support a just transition, ensuring that efforts to mitigate climate risks do not inadvertently exacerbate social and economic inequalities.

(Nandy is Assistant Professor, Economics Domain, IIM Ranchi, and Anand is Executive, BSNL. Views are personal.)