SrGBs will facilitate price discovery for other fin instruments: RBI's Rao

The issuance of sovereign green bonds (SrGBs) will facilitate price discovery for other financial instruments, and foster the growth of a green financing ecosystem in the country, Reserve Bank of India (RBI) deputy governor, M Rajeshwar Rao, has said.

Rao made these comments during a panel discussion on Climate Implications for Central Banking Organised by the IMF and Centre for Social and Economic Forum on July 19.

“The issuance of SrGBs would also help in price discovery for other financial instruments and give a fillip to development of a market for green financing ecosystem in the country,” he said.

Rao emphasised that there is a growing trend of ESG-focused funds in global financial markets, driven by institutional investors seeking greater transparency and climate-related disclosures from companies.

The increasing push for net-zero goals and climate-friendly initiatives has led to the rise of green bonds, climate funds, and blended finance mechanisms, attracting private investments in climate projects.

Concerns of greenwashing have arisen, leading to calls for future regulatory interventions to ensure genuine sustainability efforts.

“Green bonds, climate funds, and blended finance mechanisms can attract private investment towards climate projects. However, these developments do also give rise to green-washing concerns which may require regulatory interventions in future to ensure that what is being projected as ‘green’ is, in fact, actually ‘green’,” Rao said.

Rao asserted that the RBI plans on issuing guidance to banks on the stress testing for climate vulnerability of their credit portfolio.

He emphasised that scenario analysis and stress testing at a firm-level would aid in devising strategies to manage risks for individual entities.

“At a firm-level, the scenario analysis and stress testing would help frame the strategies to manage the risks for individual entities,” Rao said.

“Central banks across the globe are encouraging banks and other lenders to identify such vulnerabilities. In India, we plan on issuing guidance to banks on the stress testing for climate vulnerability of their credit portfolio soon,” he explained.

Rao added that central banks, which have traditionally focused on monetary policy and financial stability, are now recognizing climate change as a significant risk with far-reaching implications for their core objectives, necessitating proactive risk management for the stability and safety of financial entities.