RBI’s Draft Framework on Climate-Related Financial Risks: Strengthening India’s Green Finance Architecture

Climate risks are broadly categorized into two types: Physical Risks and Transition Risks. Physical risks involve the direct impact of extreme weather events (like floods, droughts, or heatwaves) on assets, collateral, and supply chains. Transition risks arise from the global shift toward a low-carbon economy, including changes in government policy, technological advancements, and shifting consumer preferences that could lead to 'stranded assets' in carbon-intensive sectors like coal or traditional manufacturing. For governance and policy, this framework is crucial. It compels financial institutions to move beyond short-term profit motives and consider long-term environmental sustainability. By mandating disclosures, the RBI aims to prevent 'greenwashing' and ensure that capital is efficiently mobilized toward sustainable projects. Furthermore, it protects the Indian financial system from systemic shocks that could arise from sudden climate-induced asset devaluations, thereby safeguarding the economy's overall health. UPSC Relevance: This development is highly relevant for GS Paper III topics such as mobilization of resources, sustainable development, and environmental conservation. Aspirants can use this as a prime example of how regulatory bodies can drive the transition to a low-carbon economy and ensure financial stability through transparency and accountability.