The Reserve Bank of India released a Discussion Paper on Climate Risk and Sustainable Finance on July 27, 2022 in line with their guidance from earlier this year. RBI also released on its website the results of a Survey on Climate Risk and Sustainable Finance undertaken in January 2022. The survey covered 12 public sector banks, 16 private sector banks and 6 foreign banks in India. The responses of the survey indicate that although Indian banks have begun taking steps in the area of climate risk and sustainable finance, there are huge gaps and there is need for immediate and strong actions in this regard.
Our Observations from the Survey
High on Awareness - Most banks are aware of the risk. Almost all banks recognised the urgency of the issue, and most considered climate risks to be a material threat to their business. This is great news as this is often the hardest part. Most banks are also aligned that they need to do something about it. At a minimum, most of the banks have decided to gradually reduce their exposure to high-carbon emitting/polluting businesses in the coming years.
Not Core to Business - However their efforts seem to lack urgency. Many do not have a person or committee clearly responsible for overseeing initiatives related to climate risk and sustainability. Very few have ESG related KPIs for their top management. It is also reflected in the fact that most of them have no dedicated teams to look at ESG. This is clearly an area of concern and the first thing that banks need to tackle starting with a board committee that’s clearly responsible for driving climate action at the bank.
Low Ambition, No Strategy - Not surprisingly hence, there is lack of a clear stated ambition when it comes to climate. Very few banks have committed to becoming carbon neutral. Yes Bank and M&M Financial Services are the only Indian financial service institutions that have committed to SBTi (The Science Based Targets initiative is a collaboration between CDP, the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature. It provides companies with a clearly-defined path to reduce emissions in line with the Paris Agreement goals) It is no wonder then that most banks lack a clear strategy for embedding ESG principles in their business, scaling up their sustainable finance and incorporating climate change risks into their existing risk management framework.
Regulatory Push - The silver lining here is the gaps are now clear and that RBI has already started the process of issuing clear guidelines on the subject (starting with the discussion paper published on 27 July 2022). While the initial years of compliance with the expected guidelines may be challenging for banks given the current gaps, we expect that all banks will be able to eventually meet the regulations.
Green Opportunity - However there is a non-linear opportunity for forward- looking banks in India that go beyond meeting regulations. Given that climate change is increasingly top of mind for affluent consumers, MNCs and Indian businesses given their NetZero commitments, we believe that there is a huge untapped opportunity for banks to go all-in and take lead on climate action and use that to capture significant market share.
What should Banks (and other financial institutions) do?
Make Climate a Board Agenda - Banks need to make climate part of the Board agenda with a committee empowered to drive initiatives related to climate risk and sustainability. Also, someone from the top management at the bank needs to charged with the responsibility of driving the agenda as prescribed by the board.
Ambition - Banks should setup and publicly announce clear ambition in terms of time line to get to NetZero emissions in line with international guidelines (like SBTi) and India’s own commitments at COP26.
Risk - Banks need to start putting a framework around types of the physical, transition and liability risks associated with climate change and actively start managing them at a loan and portfolio level.
Opportunities - Most importantly, banks should deeply understand the new opportunities that are being created because of the green transition and take lead in supporting that transition.
Build Internal Capability - Banks need to invest heavily in the capacity building of their staff on climate risk, ESG and sustainable finance. Further, banks will require dedicated resources in this area to successfully tap the opportunities arising from climate change, sustainable finance and the growing focus on ESG.
Measure & Reduce - The no-regret step that banks can immediately start with is measuring their own environmental footprint, starting with Scope 1, 2 and 3 emissions. This should also start to drive reduction of emissions from their own operations.
Report - Banks need to align their climate-related financial disclosures with an internationally accepted framework to improve the comparability and consistency of the disclosures with their counterparts globally.
As RBI quotes in its discussion paper, India has witnessed a rise in average temperature, a decrease in monsoon precipitation, a rise in extreme temperature, droughts, and sea levels; as well as increase in the frequency and intensity of severe cyclones since the middle of the twentieth century. There is strong scientific evidence that human activities have led to these changes. These developments pose challenges for humanity and warrant an immediate, large-scale and rapid reduction in GHGs. Recognising that banks have a huge impact on economic activity through the flow of credit, it is important that banks and other financial institutions lead the fight against climate change from the front.
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