Reserve Bank Deputy Governor M Rajeshwar Rao on Thursday called for a taxonomy on green finance to avoid the risk of "greenwashing".
Green financing refers to lending to environmentally sustainable economic activities.
Speaking at an event organised by the Business Standard here, Rao said a formal definition of green finance along with a taxonomy "is the need of hour" and added that it will enable more precise tracking of finance flows to green sectors in India.
"A taxonomy would also help banks and financial institutions in better assessing the climate risk in their loan portfolio, scaling up green and sustainable finance and mitigating the risk of greenwashing," he said.
The call for clear definitions and a taxonomy or a classification system, establishing a list of environmentally sustainable economic activities, comes at a time when India is looking at increasing green finance to help the climate. "Greenwashing" refers to dishonest practices designed to deceive people.
Meanwhile, Rao also said that green infrastructure investment trusts could help scale up green finance in the country, given the need to rapidly scale up finance because of the country's climate commitments.
Climate change may result in physical and transition risks that could have implications for the physical safety and financial soundness of individual regulated entities as well as for the stability of financial system, he said.
"There is a need for regulated entities to develop and implement comprehensive frameworks for understanding and assessing the potential impact of climate-related financial risks in their business strategy and operations," he added.
Welcoming the budget proposal to raise up to Rs 16,000 crore from a sovereign green bond (SGB) issue, Rao said the SGBs would provide a pricing reference for the private sector entities in India for their rupee denominated borrowing for ESG-linked debt.
"The issuance of SGBs would help in creating an ecosystem which fosters a greater flow of capital into green projects and entities undertaking such projects," he added.
The deputy governor said estimating the timing, frequency and severity of climate-related events is a challenging proposition given the uncertainties involved for financiers, but there is "no alternative but to continue working as we cannot afford to not take any action anymore".