Do Indian banks care about climate finance?

As the frequency and intensity of climate-related events increase, assessing how banks withstand various climate scenarios becomes instrumental.

The host of this year's conference, the United Arab Emirates, through its 56 lenders, committed to channelling $270 billion in green finance through its banks by 2030.

For a market that’s much larger and deeper than UAE, it is a rude wakeup call for the Indian banking system. The harsh reality is that India's leading banks lack Net-Zero targets, with only a handful disclosing emissions or green finance data. For a nation, whose government is serious about climate change and Net Zero goals, its banks need to showcase urgency, as well as capture climate-lending opportunities.

There is no formal RBI’s regulatory framework yet, for stress-testing climate risks in bank portfolios.

There is no formal green-taxonomy yet, for the entire country.

Failure To Meet Climate Goals

Last year's climate resilient stress test by an independent think-tank revealed a stark reality – Indian banks failed to meet the standards required to navigate the challenges posed by climate change. Only this year, large banks have begun to audit their own and borrowers' carbon footprint as they try to mitigate financial risks amid growing pressure from regulators and investors to better align their ESG reporting with global norms.

Approximately a third of loans in Indian banks are directly linked to carbon-intensive sectors, encompassing activities like coal mining and diesel-intensive transportation. The absence of climate-risk disclosures poses a risk to a bank's attractiveness to global investors, and a delayed shift towards greener business models could escalate borrowing costs for companies.

Last year, RBI’s independent survey, revealed inadequacies in banks' risk assessments concerning climate change. The findings underscored the urgency for banks to establish a mechanism at either the Board or top management level to oversee and enhance initiatives related to climate risk and sustainability. As the frequency and intensity of climate-related events increase, assessing how banks withstand various climate scenarios becomes instrumental in identifying vulnerabilities and implementing adaptive measures. The RBI has been stressing that solely financing green initiatives won't be adequate; credible transition plans for existing firms are essential, ensuring a balance between sustainability and maintaining their output and growth.

Banks Play An Important Role

The role of Indian commercial banks in financing India's Net Zero transition is critical for the nation's sustainable future. Firstly, in facilitating the transition of brown assets to green, commercial banks become instrumental in steering existing, carbon-intensive industries toward cleaner and more sustainable practices. This transformation is indispensable for reducing overall carbon footprints and aligning with the broader goals of achieving a Net Zero economy.

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Moreover, the involvement of commercial banks is pivotal in supporting newer and greener industrial innovations. By directing financial resources towards research and development in sustainable technologies, these banks can foster a culture of innovation, enabling the emergence of environmentally friendly solutions. This not only propels India's competitiveness in the global market but also positions the nation as a leader in sustainable industrial practices.

The phased transition from fossil-based industries to cleaner alternatives is a prolonged yet imperative journey. Indian commercial banks, through strategic financing, can play a crucial role in supporting industries in this transition. By providing financial incentives and support mechanisms for the shift to cleaner alternatives, banks contribute to the gradual phasing out of environmentally detrimental practices.

India’s Net Zero Challenge

India stands at a crucial juncture where it must transcend the role of a mere passive recipient of grants and proactively engage in the global pursuit of achieving Net Zero emissions. Leveraging its own capital and tapping into its abundant pool of talent becomes imperative for the nation to not only meet its climate goals but also to assert its position as a responsible global player in the fight against climate change.

The transformation required extends to the very core of the banking sector. A fundamental reorientation is necessary, compelling banks to integrate climate considerations into every facet of their operations. This starts with lending decisions, where investments are directed towards projects that align with sustainable and low-carbon practices. By prioritising green initiatives, the banking sector becomes a catalyst for funding projects that contribute to the reduction of carbon footprints and promote environmental stewardship.

Risk assessments also need to undergo a paradigm shift, incorporating climate-related risks into the evaluation criteria. As the impacts of climate change become more pronounced, understanding and mitigating these risks become integral to the long-term viability of financial institutions. By incorporating climate considerations into risk assessments, banks not only safeguard their own stability but contribute to building a resilient financial sector that can withstand the challenges posed by a changing climate.

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The overarching financial strategy of Indian banks needs to reflect a commitment to sustainability. This involves developing products and services that encourage environmentally responsible practices, supporting green initiatives, and incentivising clients and businesses to adopt eco-friendly measures. By aligning their financial strategies with climate goals, Indian banks can spearhead a transition towards a low-carbon economy, reinforcing the country's commitment to a sustainable future.

Indian banks must recognise the interconnectedness of environmental sustainability with economic resilience. Ignoring climate-related risks is a perilous oversight that could have far-reaching consequences for the stability and prosperity of the nation. Indian banks can play a proactive role in the nation’s journey towards a sustainable and resilient future.

Srinath Sridharan is Author, Policy Researcher & Corporate Advisor, Twitter: @ssmumbai. Views are personal, and do not represent the stand of this publication.