Why Is it Necessary To Climate-Proof India’s Financial Future?
When we first started talking about climate change, it was the 1980’s and it seemed a far-away threat, something that sci-fi Hollywood movies showcased to keep the world on tenterhooks. Well, that’s not the case anymore. The increasing frequency of weather extremities like floods, droughts, cyclones, and heatwaves indicate that climate change is, no longer, a distance threat! It has a direct economic and financial impact, especially in case of a fast-developing country like India.
The Council on Energy, Environment and Water (CEEW), a leading climate think-tank in India, identified significant economic losses to India due to climate change. According to a report by CEEW, extreme weather events, and their impact on agriculture, health, and infrastructure in India runs into losses worth billions of dollars. According to a WMO report, 80% of the natural catastrophes that affected Asia in 2021 were caused by floods and storms, leading to fatalities as well as economic damage worth about USD 35.6 billion. India suffered damages worth USD 7.6 billion because of extreme flood and cyclone events. To give you a bigger picture, the 10 most expensive climate-related disasters in 2022 cost the world about USD 170 billion in insured damages.
India’s financial system faces rising exposure to both physical and transition-related climate risks because the natural disruptions endanger not just the infrastructure and the livelihoods, but also threaten the stability of banks, insurers, and capital markets. Currently, India is standing at a crucial juncture vis-à-vis her economic future. According to IMF’s April 2025 outlook, India remains one of the fastest-growing economies of the world. While the Indian economy is poised to grow at 6.2% in 2025, the growing threat of climate change could throw us off course. Since a nation’s financial system is its backbone, India must urgently reshape its financial architecture according to the realities of the climate change.
Here's a comprehensive strategy to climate-proof India’s financial system -
Climate Risk Means Financial Risk
The first step should be recognizing climate change as a financial concern as well as an environmental one. The Reserve Bank of India (RBI) has already acknowledged this with the RBI Governor Sanjay Malhotra urging in March 2025 that banks and non-bank financial companies (NBFCs) should join hands in establishing a shared pool of bankable climate projects. The apex bank aims to make it imperative to integrate climate risk assessments into financial stability monitoring frameworks.
Work for a Vigorous Green Taxonomy
Green taxonomy means a classification system used to define economic activities that are environmentally sustainable. India is already developing its own GREEN TAXONOMY in wake of the commitment it has made under the PARIS AGREEMENT, which will help it achieve NET ZERO CARBON EMISSIONS by 2070. In fact, the RBI and Finance Ministry are working on frameworks to provide clear definitions and criteria for green projects, in the fields of renewable energy, pollution control, etc. The Indian investors can contribute their efforts to support India’s growing green bond market.
Sustainable Finance is the FUTURE
Terms such as Green Bonds & Loans, ESG Integration, Green Credit Mechanisms might sound alien to a vast number of Indian investors today, but sustainable finance is soon going to be a norm, and so are these terms. The Green Bonds & Loans market can be strengthened with the help of incentives, return guarantees, and a clear reporting framework. MSMEs can play a huge role in establishing the Green Credit mechanisms with the banks offering them concessional rates for loans, on conditions that meet climate resilience criteria.
Expand Climate Risk Insurance
The IMF’s World Economic Outlook 2025 has revised India’s growth forecast to 6.2% for 2025 and this growth will be supported by private consumption, particularly in the rural areas. Small farmers, unorganized labor force, urban poor are the groups most affected by disproportionate climate events. To ensure their financial security, tools like Index-Based Crop Insurance, Catastrophe Bonds, and Reinsurance Framework will come in handy. The technological leverage offered by satellite data and mobile platforms can also be harnessed for efficient underwriting and claims management so that these population groups suffer minimal losses.
Private Capital Mobilization
The Indian private sector as well as private investors need to do their bit if India is to meet its estimated $10 trillion climate finance needs by 2070. The private capital mobilization can be mobilized at scale with the following – 1) Blended Finance Instruments: Combining philanthropic capital would reduce the risk on investments and motivate private sector participation. 2) Public-Private Partnerships (PPPs): India can also explore collaboration between public and private sector in climate-dependent fields like infrastructure, renewable energy and water systems. 3) Green Banks: These special financial institutions would collect money from different sources and invest in environment-friendly projects.
Building a climate-resilient financial system won’t happen overnight. It needs across-the-board training in climate finance and risk analysis, along with creating strong data platforms. Indian Academica can be a robust support tool in this process. India needs to do it today because climate-proofing of its financial system is not just a necessity, it is a golden opportunity.
Source: Statista, based on data from the Global Commission on the Economy and Climate
(The writer is a seasoned Banker and Mortgage Specialist working for India’s largest loan distributor company and occasional political commentator.)
