This paper explores the challenges and methods for assessing the financial risks posed by the global transition to a green economy, particularly in the context of India. While decarbonisation is essential to meet the Paris Agreement targets, it could destabilise the economy by causing financial losses to carbon-intensive companies, potentially impacting banks' capital and their ability to lend. The Indian government’s decarbonisation targets, such as achieving net zero by 2070 and increasing non-fossil fuel power, expose Indian banks to transition risks. The paper reviews global and Indian climate scenarios, the complexities of modelling these risks, and the difficulties of conducting climate stress tests due to long-term horizons and data limitations. It offers recommendations for the Reserve Bank of India (RBI) to manage these risks, suggesting steps for designing effective climate stress tests
