Indian banks caught out on the challenge of climate change and the green transition

  • India’s banking sector has a crucial role to play in the fight against climate change and the green transition, but a latest report reveals that the country’s major banks are unprepared to deal with the climate change crisis.
  • The report by think tank Climate Risk Horizons (CRH) found that most Indian banks have not even begun to factor climate change into their business strategies.
  • The report says banking institutions must disclose funding levels for the renewable energy sector.

India’s energy transition is underway, but is India’s banking sector ready to tackle the related challenges and deal with the financial impacts of climate change? A new report says India’s major banks are ‘unprepared’ to deal with climate change, even though the country’s banking sector has a vital role to play in responding to the climate crisis by ‘managing the risks that climate change poses on their operations” and by “financing the energy transition”.

The report, Unprepared: India’s big banks score bad on climate challenge released earlier this month by think tank Climate Risk Horizons (CRH), ranks the country’s 34 largest banks (based on market capitalization) and finds that except for a few, most Indian banks have not even begun to integrate climate change into their business strategies even though “the most optimistic projections point to significant economic challenges for the Indian economy.

He pointed out that so far “there has been little information in the public domain to assess how the sector is preparing”. The report says Indian banks need to “build their capacity to undertake scenario analyzes that test their resilience to climate-related changes, either due to physical risks caused by the climate crisis or transitional risks caused by economic changes. in response to the climate crisis”. .

According to the report, apart from “a few notable exceptions”, most of India’s banking sector “has not even begun to put in place the most rudimentary mechanism to deal with the climate threat”.

“The fact that even major media-savvy public and private sector institutions such as SBI (State Bank of India), Union Bank, ICICI Bank, etc. are performing so badly should be extremely worrying to investors, and some thing that regulators (Reserve Bank of India and SEBI) need to sort out,” he noted.

The report states that YES Bank, IndusInd Bank, HDFC Bank and Axis Bank are the highest ranked Indian banks overall and have started to take the climate issue into account while noting that public sector giant SBI is in 6th place . In general, the ranking shows that public sector banks, despite their influence and dominance, lag behind private sector financial institutions, according to the study.

He pointed out that only seven Indian banks have policies that “exclude lending/service to entities credibly involved in deforestation, human rights abuses and biodiversity loss, etc.” and “only two banks have ruled out new financing for coal mines and coal-fired power plants.” The report acknowledges, however, that on the positive side, “27 banks have issued green loans/bonds/finance for climate change mitigation/adaptation”.

Ashish Fernandes, CEO of Climate Risk Horizons and one of the report’s authors, said “the main point is that the Indian financial system is so far lagging behind in adapting to the climate crisis” following which “there is the risk of significant financial impacts for stakeholders (financial institutions, companies, investors and by extension the economy as a whole)”.

“And there is the flip side, which is that the necessary transition to a low-carbon economy will be delayed, again with both physical and financial impacts,” he told Mongabay. -India.

Asked about the risk to investments because of this, Fernandes said that “any new investment in fossil fuels in the future, especially coal, and in a short time, new oil and gas as well, would pose a risk… but there are also other infrastructure projects that are at risk – for example, coastal roads, large dams, developments in flood plains”.

He stressed that “banks need to have a transition plan for their investment portfolio that takes this reality into account” considering that “India needs to wean itself off all fossil fuels over the next 2-3 decades”.

What the report talks about transition is also consistent with what a recent report of a committee of the Indian parliament wanted when he suggested the Indian government consider imposing a “revolving funding requirement for banks and financial institutions” to ensure that they invest a specific percentage of their investment in the renewable energy sector.

The CRH report observed that some international banks have adopted a sectoral decarbonization approach to assess their climate-related risks, “using climate transition scenarios to cover the oil and gas, power generation /utilities, transport and metals and mining”.

“Examples of this approach are Caixa Bank, Intesa Sanpaolo, Danske Bank, Mitsubishi UFJ Financial Group (MUFG), KBC Group, UBS, Banco Bradesco and ABN AMRO,” the report said.

Read more: Will forcing banks to invest in renewables help India’s energy transition?

India must set a clear target to phase out fossil fuel investment

The CRH report notes that India has adopted aggressive targets for renewable energy, rooftop solar and agriculture, transport electrification and green hydrogen for industry and that it will be therefore essential to achieve these goals to achieve India’s broader climate neutrality goals. “Banking institutions should disclose funding levels for these and other climate change mitigation and adaptation sectors,” the report said.

He said India’s current target of being carbon neutral by 2070 implies that “easier to transition” sectors (electricity, transport, industrial energy) need to start moving now and moving fast.

A 2007 photo from the Reserve Bank of India. The central bank, in its latest bulletin, highlighted how the energy transition poses a risk to Indian banks. Photo by Soham Banerjee/Flickr.

The report stresses that setting clear target dates for phasing out fossil fuel investment and exposure to carbon-intensive sectors is key to “managing the longer-term financial impacts as the global economy decarbonizes.” “because without a clear strategy in place “raising global capital will become increasingly more difficult (and likely more expensive).”

In fact, in the newsletter march 2022the Reserve Bank of India, while talking about the “green transition risks for Indian banks”, states that “the transition to a goal of net zero carbon emissions will lead to an adjustment in the production processes of industries that are directly or indirectly exposed to excessive use of fossil fuels” and “concomitantly, due to the exposure of Indian banks to these industries, there may be ripple effects on them”.

India’s central bank observes that three sectors directly exposed to fossil fuels – power, chemicals and automobiles – account for about 24% of credit to the overall industrial sector, but only 10% of the total outstanding non-retail bank credit, which implies a limited knock-on effect on the banking system. “Several other industries, however, use fossil fuels indirectly and therefore any transition to green energy may have revenue implications…therefore, the gross non-performing asset ratio (GNPA) of these industries can be sensitive to the transition to green energy, and their impact on the entire banking system needs to be watched closely,” the RBI bulletin states.

On the role of India’s central bank, Fernandes said it looks like “the RBI is slowly waking up on this issue.”

“He has signaled that he will communicate with the banks on this, but we have yet to see any concrete action or regulation. Obviously, the sooner the RBI can act, the better,” a- he declared.

The CRH report states that the RBI has yet to issue climate-related guidance on assessing or managing these risks for regular and commercial banks, although according to the 2022 Economic Survey, the banking regulator or in the process of evaluating the progress of banks in managing climate risks.

Meanwhile, Sonali Gokhale, a finance specialist for the renewable energy sector, who works with Prayas, a Pune-based organization that works on energy issues, explained that “currently, the Indian banking sector is grappling with a legacy non-performing loans from various sectors, of which the electricity sector is a major contributor.

“Addressing the fundamental and often interconnected problems of the sector is rightly the political priority of regulators. However, RBI and SEBI have recently taken steps to launch a discourse on greening financial systems in the form of advisory papers and research,” she told Mongabay-India.

“RBI also joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) as a member on April 23, 2021, and is reportedly in the process of issuing an advisory working paper to assess climate risks for its regulated entities. . We anticipate that in due course, appropriate frameworks for climate risk assessment will be developed by regulators in line with the maturity of Indian financial markets and future growth plans,” Gokhale said.

Read more: India’s renewable energy industry faces financial challenges

Banner image: A wind farm near Nashik, Maharashtra. Photo by SuyogJoshiPhotography/Wikimedia Commons.