Physical Risk - Risk Management - Transition Risk

India: A Case Study in Climate Mitigation and Adaptation

This article explores the difficult trade-offs that need to be made between the competing claims of climate mitigation, adaptation, and economic development.

Thursday, September 14, 2023

By Maxine Nelson

This article has been extensively updated, incorporating new COP 27 commitments, Reserve Bank of India (RBI) statements and current green bond issuance. It was originally published Oct. 18, 2021.


After decades of population growth and economic development, India is now the third largest emitter of greenhouse gases in the world. In addition, India is among the countries most vulnerable to climate change due to its geography and dependence on agriculture.

It has been estimated that if emissions are not significantly reduced, India could suffer economic losses of USD 35 trillion. Indeed, much of India has been experiencing annual heatwaves followed by intense flooding, and in 2021 alone it experienced even more extreme weather events — including cyclones and a glacier collapse. Thus, India makes a thought-provoking case study for policymakers and risk professionals given the difficult trade-offs that need to be made between the competing claims of climate mitigation, adaptation and economic development.

Climate Change’s Effect on India

The banking regulator, Reserve Bank of India (RBI), explains that “India has witnessed changes in climatic patterns in line with the rest of the world… the rainfall pattern, particularly with respect to the [south west monsoon] SWM, which provides around 75 percent of the annual rainfall, has undergone significant changes. Moreover, the occurrence of extreme weather events like floods/unseasonal rainfall, heat waves and cyclones has increased during the past two decades, and data reveal that some of the key agricultural states in India have been the most affected by such events.”

A more recent, detailed RBI study points out that “it is the increased frequency of extreme weather occurrences that is breaking the back of our capability to cope with natural disasters.” As shown by India’s nationally determined contributions (NDCs) — the actions it has committed to take to reduce its emissions and adapt to the impacts of climate change — it is among the most vulnerable countries in the world to the impact of accelerated sea level rise from global warming. This is due to its long coastline, large number of islands and population of 170 million living in coastal regions.

The RBI also notes that precipitation and temperature — the two key climate indicators — “play a crucial role in the overall health of the Indian economy.” As well as affecting food production, the extreme weather in agricultural states impacts employment and GDP, with approximately 44% of the working population employed in agriculture and allied sectors which contribute about 20% of GDP, according to M.K. Jain, the deputy governor of the Reserve Bank. Several challenges confronting Indian agriculture, including diminishing and degrading natural resources and unprecedented climate change, need to be tackled for the long-term sustainability and viability of Indian agriculture.

However, there is uncertainty over how large the impacts might be. The Swiss Re Institute, for example, estimates a 35% reduction in the level of India’s GDP by 2050 if greenhouse gas emissions are not reduced globally, and approximately a 6% GDP reduction even if the Paris Agreement goals are met. An Oxford Economics report “Estimating the Economic Impact of Global Warming” has framed the impact differently, estimating that India’s GDP could be 90% lower in 2100 than it would be if there was no climate change, suggesting that climate change has the potential to absorb all of India’s future prospective growth in income per capita. And Deloitte has estimated USD 35 trillion of economic losses by 2070. While these different approaches produce diverse estimates, they all show that the impact will be big and require additional investments in both mitigation and adaptation.

India’s Effect on Climate Change

Not only will the changing climate have a significant impact on India, but India is also expected to have a significant impact on the climate. Although historically it has not had high emissions, India rose to the number three spot in the national emissions rankings 15 years ago, behind China and the U.S. The RBI noted that “With the increase in population, the cumulative level of greenhouse gas (GHG) emissions has increased, resulting in a rise of average temperature. According to a study by the International Energy Agency (IEA), India emitted 2,299 million tonnes of carbon dioxide (CO2) in 2018, a rise of 4.8% over the previous year.”

Unfortunately, India’s future potential emissions are not yet aligned with the Paris Agreement goals. India’s NDCs currently correspond to temperature increases above 3°C, according to Climate Action Tracker. (You can find out more about NDCs and their place in the Paris Agreement in this short article.) India increased its commitment to reduce greenhouse gas emissions at COP 26, the 2021 annual meeting of the signatories of the Paris Agreement, where it pledged to cut its emissions to net zero by 2070. While this was a large increase in commitment, it isn’t yet aligned with the worldwide goal of cutting emissions to net zero by 2050 needed to limit global warming to 1.5°C.

maxine-nelsonMaxine Nelson

In advance of COP 27, India has again increased its commitment and pledged to a 45% reduction in GDP emissions intensity by 2030 — marking an 10% increase from the previous pledge. Any emissions reduction is helpful to mitigate climate change. However, as the pledge is based on emissions intensity and not absolute emissions, emissions can continue increasing as the economy expands. This pledge, therefore, doesn’t meet the net-zero goal of reducing emissions by 45% by 2030. Still, the effort required to overcome the challenge of rapidly expanding an economy while decreasing emissions intensity needs to be appreciated.

To further mitigate climate change, India may need to agree to reduce its emissions even more — a big task for a developing economy with average annual energy consumption of a third the global average, and per capita emissions already 10 times lower than that of the U.S., four times lower than China, and three times lower than Europe. With IPCC reports highlighting the urgency of tackling climate change quickly to reduce the loss and damage for humans and ecosystems, it is even more important that emissions reductions are ambitious.

Financing Mitigation and Adaptation

A 2021 RBI Financial Stability Report noted that climate change and the associated mitigating policy commitments are “set to reshape the macroeconomic and financial landscape”. Extensive funding is needed both to reduce future emissions and to finance the adaptation needed to manage the impacts of climate change. In their 2016 NDC, India estimated that at least USD 2.5 trillion (at 2014-15 prices) would be required for meeting its climate change actions between 2016 and 2030. And the International Energy Agency estimates that nearly 60% of India’s CO2 emissions in the late 2030s will be coming from infrastructure and machines that do not exist today. If this investment is to be sustainable, USD 1.4 trillion extra funding (above that required for current policies) is needed over the next 20 years.

Like most of the world, green bond issuance in India — which could provide some of this funding — is currently a small proportion of all bond issuance.  The rate of issuance is increasing, however, with USD 21.6 billion of green, sustainable or social bonds issued in 2022. And in 2023, the Government of India entered the green finance market issuing USD 2 billion of green bonds to finance their spending on a range of projects including solar power, green hydrogen and afforestation. As they obtained a greenium (lower financing costs than other equivalent bonds), we should expect to see more of these issued in the future.

There are also substantial opportunities in other financial markets, such as the development of a derivatives market to aid adaptation via products such as:

  • agricultural commodity derivatives, which can help reduce risks by enabling continuous price discovery and providing hedging
  • weather derivatives, which can hedge the risks of high-probability, low-risk events

Of course, meeting the needs of climate change financing carries the usual financial risk implications of any lending. An RBI analysis shows that banks’ direct exposure to fossil fuels (through electricity, chemicals and cars) is 10% of total outstanding non-retail bank credit, so it should have a limited impact on the banking system. However, it notes that many other industries indirectly use fossil fuels and their impacts also need to be closely monitored.

Regulatory Response

The RBI has noted that policy measures such as a deepening of the corporate bond market, standardization of green investment terminology, consistent corporate reporting and removing information asymmetry between investors and recipients can make a significant contribution in addressing some of the shortcomings of the green finance market.

Like in most of the rest of the world, there is an increasing regulatory focus on climate risk. The RBI Governor has stated that guidelines will be issued about disclosure of climate-related risks, and also scenario analysis and stress testing. This followed last year’s RBI consultation which asked for inputs on a comprehensive range of topics from climate risk governance to strategy, and risk monitoring, management and mitigation at regulated entities. This consultation, in turn, built on the results of an RBI survey of banks that was also published last year. The survey found that “although banks have begun taking steps in the area of climate risk and sustainable finance, there remains a need for concerted effort and further action in this regard.” It also found that board-level engagement is inadequate, and few banks had a strategy for incorporating climate risk into their risk management framework. To see what leading climate risk firms are doing globally look at GARP’s whitepaper: “Climate Risk Leadership: Lessons From 4 Annual Surveys.”

Given the widespread impact of climate change, it isn’t just the banking regulator that is looking at how climate risk will affect firms in its jurisdiction. In 2021, the Securities and Exchange Board of India (SEBI) mandated that the largest 1,000 listed firms complete a Business Responsibility and Sustainability Report. The report asks for information like material ESG risks and opportunities and their financial implications; sustainability related targets and performance; and their greenhouse gas emissions. Companies’ value chains also need to be assessed. This requirement is being progressively rolled out from 2023 to 2027, with the largest companies also required to get assurance of their disclosures.

In addition, SEBI has altered the rules for mutual funds, allowing them to have multiple ESG schemes with different strategies; in the past, a mutual fund could only have one ESG fund. This increase in scope follows one for green debt securities, which was expanded to include bonds such as blue bonds (sustainable water management and marine sector), yellow bonds (solar energy generation and transmission), transition bonds and adaptation bonds. Both of these expansions in scope should increase financing for sustainability related initiatives.

Reflecting the fact that addressing climate change is a global problem, needing both local and global solutions, the RBI joined the Network for Greening the Financial System (NGFS) in April 2021. The NGFS’s purpose is to strengthen the global response required to meet the goals of the Paris Agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments. These goals align very well with the work India needs to undertake to make not just its financial system resilient to the risks from climate change, but to balance mitigation, adaptation, and economic development across the country.

Maxine Nelson, Ph.D, Senior Vice President, GARP Risk Institute, currently focusses on sustainability and climate risk management. She has extensive experience in risk, capital and regulation gained from a wide variety of roles across firms including Head of Wholesale Credit Analytics at HSBC. She also worked at the U.K. Financial Services Authority, where she was responsible for counterparty credit risk during the last financial crisis.

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