—Cosmo’s Factory by Creedence Clearwater Revival
Some central banks have a single mandate and some have dual mandates. The Reserve Bank of India (RBI) has an explicit two-fold legal remit, price stability and growth patronage, although the RBI Act’s preamble also includes regulating the issuance of bank notes, the management of reserves to foster monetary stability and operation of the country’s currency and credit system “to its advantage.”
There is now a growing clamour around the world that central banks, including RBI, should include climate change as part of their legal mandate. This merits some exploration.
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The growing demand for including sustainability objectives in central bank mandates stems from the increasingly self-evident and material effects of climate change, especially through the emergence of a three-cornered risk matrix for the financial system: physical risks to assets through extreme weather events, transition risks for high-carbon projects slow in reducing their carbon footprint and liability risks arising from weather-related losses or legal actions against emitters.
All these risks have a way of affecting financial institutions and eventually financial stability. Central banks globally are being forced to deploy monetary policy as well as micro- and macro-prudential instruments to manage these risks.
The fickle and unpredictable nature of the weather lately has become a visible and undeniable marker of climate change, apart from its traditional role as an ice-breaker and focus of conversations.
A recent report from the World Meteorological Organization found Asia’s 2024 average temperature 1.04° Celsius above the 1991-2020 average, making it the warmest or second-warmest year on record, depending on the data-set used. India also sizzled along with the rest of Asia. But the summer of 2025 came and vanished before anybody could blink. Rains arrived in coastal Mumbai 16 days before its normal schedule and Hyderabad missed its date with the routine heat-wave of May.
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This unpredictable blow-hot-blow-cold weather pattern has adverse effects on communities and economies, especially the farming sector. Fickle weather patterns present governments, policy experts, regulators, financial institutions and businesses with new but unquantifiable risks.
RBI has been working to develop a climate risk framework that will help borrowers, lenders and the regulator assess and develop risk mitigation tools. To that end, it released in February 2024 a draft disclosure framework for regulated entities (REs) on climate-related financial risks. The draft’s covering note stated: “There is a need for a better, consistent and comparable disclosure framework for REs, as inadequate information about climate-related financial risks can lead to mispricing of assets and misallocation of capital by them.”
Under the draft guidelines, REs need to make climate-related disclosures in four areas: governance, strategy, risk management and metrics and targets. The conversion of the draft framework into final guidelines, which involves taking stakeholder inputs into account, is a work-in-progress even after 16 months. This indicates the difficulty in pinning down exact metrics.
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A recent policy brief from the United Nations Environment Programme provides a landscape analysis within the Asia-Pacific region of climate-related risks in financial regulation and supervision. The study shows that most central banks in the region have issued supervisory guidelines on climate risk management, albeit with varying degrees of prescription.
RBI shares one common feature with most other central banks in the region: there are no capital adjustments required for REs based on climate-related issues. But that is where the commonalities end. Compared with RBI’s 16-month-old draft, many central banks in the region already have formal risk management guidelines and climate risk disclosure norms in place.
But what really pushes the envelope is the explicit inclusion of climate change and sustainability objectives in the mandates of central banks in Malaysia, the Philippines, Singapore and New Zealand. At a slight remove are central bank mandates in China, South Korea, Thailand and Indonesia, all of which show a somewhat tacit integration of the same objectives. India, Japan and Australia are outliers with neither explicit nor implicit integration of sustainability objectives in their legal remit.
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Former RBI governor Raghuram Rajan, in a 2023 Finance & Development article, argued against including climate change in central bank mandates, citing limited central bank effectiveness in combating it and a likelihood that this could detract them from their primary mandates.
The last time mandates changed was after the 2008 financial crisis. This gives rise to the compelling logic that even climate change is a crisis and should be recognized as such. In India, changing the central bank’s mandate would involve amending the RBI Act and that requires political mobilization. It also implies an investment of time.
Meanwhile, RBI seems to be exploring the alternative of integrating implicit measures, gingerly but surely.
The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal.
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