Climate change is a global threat having social, economic and environmental consequences. It may result in risks, both operational and otherwise, which may have a direct and indirect effect on the functioning of various sectors of the economy. This may lead to ripples across the real economy which may have a consequential effect on economic growth, especially of developing economies. Thus, the need of the hour is to analyse the risks and plan for the future.
What are climate-related risks?
Generally, climate-related risks may broadly be classified into transitional and physical risks.
The transitional risks are those which may arise due to the transition to a low-carbon economy which include technological risks, policy and legal risks, reputational risks and market risks. Technological risks arise due to technological improvements which result in energy efficiency having a significant effect on the organisation’s mode of functioning and cost. Policy and legal risks are basically the regulatory environments and their impact on the organisation’s operations. Reputational risks are those arising due to a change in customer preference and its impact on the organisation. Market risks arise due to sudden shifts in supply and demand of certain commodities having an impact on the firm’s operation.
Physical risks may broadly be classified into acute and chronic risks. While acute risks are risks to operation due to a sudden change in weather/natural calamities, chronic risks are operational risks due to a rise in temperature/rainfall and climate patterns.
How to tackle climate-related risks?
Tackling climate-related risks may, in utmost circumstances, warrant structural reforms across sectors. For example, a time may come when there may be non-availability of natural fuel, say coal resources, to charge the economy which may demand structural reforms across the fuel sector. This involves redesigning the production process, ensuring alternate resource availability coupled with reskilling the existing labourers to drive the production process. So, planning in advance at the individual unit as well as collective industry level is imperative to support future structural rebalancing and maintain the growth momentum of the economy.
Climate risk fund should essentially be a component of the budget in every organisation, which may be diverted for climate-related technology, which is the mantra of the future. An organisation should identify possible environmentally friendly and sustainable technological innovations or sustainable products in its sector for effective future planning, thereby ensuring resilience to face the vagaries of climate change. There are already mechanisms such as Climate Investment Funds (CIF), an initiative of G8 and G20 countries which provides multilateral climate finance to developing countries to fund projects related to low carbon, clean development, green growth etc. This may reduce inter alia risks for investors for piloting new technologies, thereby minimising the risk associated with investing alone. Research shows that the same has been effective to a certain extent for a few developing economies.
India and climate-related risks
For the last several years, India has gone ahead with investment in green technologies, especially through the initiation of an ambitious National Action Plan for climate change, with its key components facilitating target-oriented sustainable development. India has also succeeded, to a great extent, in investments in renewable energy guided by initiatives of the Central government, supported by a few state governments. However, what’s required at the moment is exploring minimising climate-related risks. UN Economic and Social Commission for Asia and the Pacific (UNESCAP) estimates that the annualised average loss due to extreme natural hazards amounts to 3.35 percent of GDP, which may increase further under the worse scenario. Several Indian states have also been identified as most vulnerable to climate-related disasters.
Thus, what is required at the moment is an ambitious plan to be spearheaded by respective states on reducing climate-related risks. There is a positive correlation between climate-related risks and poverty, as the states which are risk prone have a high poverty level. A sustainable development strategy is the need of the hour, wherein the vulnerable section of society needs to be brought to the forefront coupled with investment in green technologies. Wherever required, the states may coordinate with multilateral agencies to tap the additional funds required in this regard. The smart cities which are envisaged in our country may also be fine-tuned by the implementation agencies under the guidance of respective state governments for promoting sustainable cities or transit-oriented development.
Environmental impact assessment should essentially be part of a cost-benefit analysis for huge investments which may have far-reaching consequences on a particular region. The environmentally sensitive zones should be treated with care, with development projects to be carefully planned to ensure ecological stability. A positive aspect worth mentioning in this context is that 65 percent of the allocated MNREGA budget goes into natural resources management, and related green infrastructure and nature-based solutions. Also, the XV Finance commission grants majorly go for sustainable development activities, for which, care may be taken to reduce leakages and effective utilisation of funds. The ambitious plan under Prime Minister GatiShakti focussing on integrated development may further strengthen these initiatives. Also, the reformulated National Disaster Management Plan as a holistic approach now integrates disaster preparedness, mitigation, and disaster risk reduction (DRR) into plans and policies.
The measures taken by India are welcome, however, the plan ahead for India may be implementing integrated solutions incorporating Nature-based Solutions (NBS) to create liveable and resilient cities, which may reduce inter alia exposure to climate hazards. NBS has the potential to address climate change issues and at the same time support biodiversity.
Surjith Karthikeyan serves as Civil Servant at Indian Ministry of Finance. Views expressed are personal.
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