The Bank of England recently published its climate-related financial disclosure, thereby bringing clarity of approach to manage the risks from climate change across its policy functions. European banking systems are moving ahead bringing in new regulations which will impact doing businesses with other geographies.
For example, India’s share in exports to Europe stands at around 20%, and given India’s interest in the region, it will be important for Indian banks to prepare to build mechanism which will allow it to
The Bank of England recently published its climate-related financial disclosure, thereby bringing clarity of approach to manage the risks from climate change across its policy functions. European banking systems are moving ahead bringing in new regulations which will impact doing businesses with other geographies.
For example, India’s share in exports to Europe stands at around 20%, and given India’s interest in the region, it will be important for Indian banks to prepare to build mechanism which will allow it to comply with such jurisdictions where rules on disclosures of climate and environmental risks are becoming stricter.
India as a signatory to the 2015 Paris Climate Agreement, have expressed commitment to lessen the total predicted carbon emissions by one billion tonnes by 2030 and decrease carbon intensity by more than 45% by 2030; while in the long term by 2070 India hopes to achieve net-zero emissions.
In the fiscal space, the government of India towards supporting low-carbon transition, had introduced a coal cess in 2010, while introducing schemes to facilitate deployment of electric vehicles, amongst others.
On the regulatory aspect, India’s central bank has shown responsibility towards supporting the need towards transitioning to a low-carbon economy and has been advising Banks to set up board-accepted voluntary funding targets to encourage green funding. It has also joined the 42-member Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Most importantly and as a good step, Securities and Exchange Board of India introduced Business Responsibility and Sustainability Reporting (BRSR) Core wherein the top 150 listed entities (by market capitalisation) will be required to disclose on a set of key indicators from financial year 2024, the company’s involvement in ESG investing. This shall be gradually extended to the top 1000 listed entities by financial year 2027.
There is often a discussion of having a green bank. The fact today is that the existing Indian Banks have ample wherewithal to work towards promoting green finance while facilitating green transition.
In fact, public and private sector banks in India have the potential to become the pivot and act as a conduit while limiting industries to release various greenhouse gases and move towards sustainable business models.
Through its operational structure banks are uniquely placed to bring in an element of quantifiable measurement while doing business with its clients. A select focussed and indicative measure to help to create positive, enduring change by Indian banks should be explored.
Firstly, regulatory authorities in India could allocate a reasonable share of the Bank’s loan assets annually towards funding low-carbon technologies. This could be in sync with the priority sector lending (PSL) for banks. While the RBI has been providing incentives to banks for lending towards greener industries and projects, by introducing PSL under off-grid renewable energy solutions, it is important to widen its scope and support other environmental goods in India like electric cars, green hydrogen, and other environmentally friendly technologies.
Secondly, as part of bank’s efforts regulatory authorities may allow them to offer reduced interest rates or extend longer repayment for credits to firms that invest in energy-efficient mechanisms.
Thirdly, accounting for impact of climate change upon all its exposures and charging a thin premium to begin with, if the threshold is above a particular scale which is considered high on climate emissions, as a banking practise in India. This will in turn promote efforts towards decarbonisation and sustainability principles, amongst its current counterparties in the industry by setting internal targets. In fact, such actions by Indian banks will also help companies to undertake sustainability-linked capex and R&D thereby helping to cater to both Scope 1 emissions (direct emissions, as from fossil-fuel combustion) and Scope 2 emissions (indirect emissions, as from purchasing electricity, heat, or steam). It will also be a win-win situation for both banks and industry.
Fourthly, it is also imperative for rating agencies to build financial structures with an element of uniformity so that incomparable industries are not weighed at an equal footing for their level of climate emissions – for example a solar based company may receive a better rating over steel by virtue of their area of business despite possibly having better financials. In a similar vein, environmental factors may be given a higher weightage over social and governance factors as they are determining factor towards climate emissions. At the same time aspects as “greenwashing” should be closely monitored by rating agencies.
Fifthly, and as a corollary to the above, it is critical for banks to explore carefully the risks associated with climate change while evaluating and sanctioning a project which is located to cyclone or drought prone areas, amongst others due to climate change. If otherwise, then banks could possibly be prepared to apply haircuts to assets which are materially exposed to such risks. Risk management groups may also explore incorporating climate risk scenarios into their stress tests.
Last but not the least, a conscious focus by banks in India towards supporting adaptation (builds resilience to climate change), besides mitigation (reduces greenhouse gas emissions). Adaptation projects are crucial, but have got much less attention. According to a study India came in the third place after China and US as being amongst the most vulnerable to climate change, due to cyclones, hurricanes, hotter temperatures, drought, rising sea levels, flooding, amongst others.
It has been observed that in the UN-convened Net-Zero Banking Alliance which represents over 40% of global banking assets and committed to aligning their lending and investment portfolios with net-zero emissions, does not figure any Indian banks, while developing countries like Brazil, Malaysia, Russia, South Africa, are present.
While regulators are doing its bit, Banks in India as a practise could also voluntarily acclimatise for the inevitable tomorrow which will bring stringent mandatory climate reporting. They should progressively blend its near-term action with accountability towards climate change.
This article is authored by Rahul Mazumdar, economist, India EXIM Bank.
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