The IMF’s Index for Risk Management (INFORM) climate risk index indicates that among BRICS countries and major advanced economies, India is the most vulnerable to climate-induced physical risks. A factor that has always remained in the background for the financial sector but is now undeniable - climate change and climate risk are now getting more attention. This is because of the risks it brings to financial systems and economies. According to the INFORM Climate Risk Index by the IMF, India is gauged to be most vulnerable to physical risks brought on by climate.
This blog outlines the various risks climate risk and climate change pose to economies including India -
Credit risk As climate change brings unpredictable climate events like unseasonal rainfall and extreme drought, it plays a direct role in the borrower’s ability to pay back loans to banks and NBFCs. Not only do extreme climate events play an adverse role in forecasting incomes, but also take away a lot of savings because of loss to livelihoods like crop damage, materials damage and loss of days of livelihood because of extreme weather.
To provide some context, a 2021 study by Lancet Planetary Health Journal found that 75% of the Indian workforce is associated with labour that is heat-exposed. Job losses and loss of productivity will play a major role for a huge demographic in India - affecting their credit risk.
Sector-specific risks A lot of lending done by the financial sector- banks and NBFCs included - is for sectors that have a high carbon footprint and related emissions. As climate change accelerates, the focus will now shift to prioritize lending to activities that counter climate change - green businesses and green-livelihood opportunities. At Rang De as well, we are trying our best to work more and more with impact partner organizations that work on the intersection of climate change and livelihoods. A focused long-term approach is required by financial systems to consciously invest in green opportunities.
Political and geographical risks Extreme climate has already brought to attention the fight for resources like water and oil. If climate change intensifies, there is a risk that a fight for natural resources will bring political and economic instability not only to individuals and communities but even to nations overall. In the case of clashes or war, financial systems are hit drastically and this loss can be traced back to changing climate. Climate change can also rock economies by interfering with growth patterns of essential crops which in turn feeds into volatility in prices of foodgrains and increased inflation. The way ahead Climate change is now undeniable and we are seeing extreme climate events all across the world. The way ahead is to be cognizant of these risks and plan to support as many green activities, businesses and livelihoods as possible through low-cost credit. By tailoring credit and loans to vulnerable communities grappling with climate change and those working in renewable energy and sustainable livelihoods, the risk of lending can be reduced and controlled.
At Rang De, we take climate change seriously and we are committed to working with impact partner organizations working in carbon credits, livelihoods, green energy and renewable energy. Going forward, we are trying to work more with communities and organizations dealing with climate change - this includes farmers from areas affected by climate change like Marathwada and Telangana to farmers exploring secondary sources of income because of unpredictable climates like fish ponds for farmers from Bihar. This has also resulted in farmers trying their hand at rural enterprises - another aspect that we’re looking forward to championing.
Climate change is a reality and we’re helping rural entrepreneurs all over India prepare. To invest in a rural entrepreneur and create impact, join the Rang De community of more than 8000 social investors at rangde.in