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Indian banks ‘unprepared’ for climate-related risks, RBI must take action, new report says

None of the 34 banks Climate Risk Horizons analysed have assessed the resilience of their portfolios in the face of climate change. Only 2 have committed to stop funding new coal power plants.

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New Delhi: India’s largest banks are not adequately prepared to adapt to climate change, and are not yet incorporating climate-related financial risks into their day-to-day decision-making and business strategies, a new report found.

According to the report by think-tank Climate Risk Horizons released Monday, banks — particularly central banks — have an important role to play in mitigating risks due to climate change as well as financing the transition to clean energy.

India is among the most vulnerable countries to climate change, with its per-capita GDP 16 per cent lower, since 1991, than if there was no human-induced global warming, the latest report by the UN Intergovernmental Panel on Climate Change (IPCC) said.

Several financial institutions have said India’s GDP will suffer because of climate change. However, the Climate Risk Horizons report found that none of the 34 banks analysed have assessed the resilience of their portfolios in the face of climate change. Only two have committed to stop funding new coal power plants.

The report analysed publicly available information of 34 banks against 10 criteria, for a total of 20 points. Twenty-nine of these banks scored less than 10 points, which “should be seen as a blinking red warning light”, the report said. 

The banks analysed include majors like ICICI Bank, Kotak Mahindra Bank, Bank of India, State Bank of India (SBI) and Punjab National Bank.

“This collective inaction is a stark reminder of potential long-term damage to the Indian economy from financial institutions that are asleep at the wheel when it comes to addressing the risks from climate change. This also underlines the need for corrective action from regulatory agencies such as the Reserve Bank of India,” it added.

Also read: Mumbai announces net-zero roadmap with 2050 in sight, 1st south Asian city to set such timeline

Private banks ahead of public banks

Of the 34 banks analysed, 12 were from the public sector, 18 were from the private sector, and four were small finance banks, representing Rs 26.81 lakh crore as on 31 March 2021.

Some of the criteria used to assess the banks included a commitment to phase out investments in coal, disclosing and verifying direct and indirect emissions, issuing green loans and financing climate mitigation or adaptation, and net-zero targets for different types of emissions and their implementation plans.

With 15 points, Yes Bank scored the highest, earning over the others for disclosing and verifying its emissions under scopes one, two, and three.

Under the Greenhouse Gas Protocol, scope one emissions are defined as direct emissions from owned or controlled sources (such as fossil fuels). Scope two includes indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope three includes all other indirect emissions that occur in a company’s value chain.

IndusInd Bank came second with 14 points, while Axis Bank and HDFC Bank stood at third position with 12 points.

“The top 10 banks are all private sector banks except for the SBI in sixth position. It is worth mentioning that more than half of the 34 banks scored either zero or 1 point,” said the report.

Bank of Baroda, Punjab National Bank, Karnataka Bank, Bank of India, and Canara Bank were among the institutions that scored just one point.

Also read: ‘Code red for humanity’ — 3.3 billion people are vulnerable, UN’s climate change report says

Significant findings

According to the report, none of the banks have set long-term net-zero targets with an implementation plan covering scope one, two, and three emissions.

HDFC Bank and Yes Bank were the only two to set targets under scope one and two emissions, while the SBI had “a long-term carbon neutral target year, without specifying the scope of emissions included”.

At the UN Climate Change Conference (COP26) held in Glasgow in November 2021, India pledged to achieve net-zero emissions by 2070, accelerating the need for a roadmap across sectors, including banking, which will sustain economic development while meeting this goal.

Most banks (26) didn’t disclose their emissions under scopes one and two, while only six had their emissions verified by a third party, the report said.

“On the positive side, 27 banks have issued green loans/bonds/financing towards climate change mitigation/adaptation. However, only 11 banks have disclosed individual values of the relevant financed activities, making independent verification difficult,” it added.

To become more climate-change resilient and better prepare for the financial risks that result from climate change, the first step banks should take is to be more transparent about their emissions, the report said, adding that Banks should also make a greater effort to exclude investments for the expansion of coal in their portfolios.

India’s banking sector and climate change

As the regulator of banks, the Reserve Bank of India has a significant role to play in shaping how banks adapt to climate change, the report noted.

In recent years, the RBI has moved to acknowledge the risks climate change will pose to financial stability. In May 2021, for instance, it set up a Sustainable Finance Group within its Department of Regulation “to coordinate with other national and international agencies on issues relating to climate change”.

In a bulletin issued this month, the RBI analysed the impact of the green energy transition on fossil fuel dependent industries.

“However, despite these statements over the last two years and more, the RBI has not yet issued any climate-related guidelines on assessing or managing risks and compliance culture or business strategy for scheduled and commercial banks (SCBs),” the Climate Risk Horizons report said.

“Globally, central banks are waking up to the climate issue. Over 106 banks globally representing US$68 trillion in assets have committed to achieving net zero emissions by 2050. The UN convened Net-Zero Banking Alliance lists banks from 40 countries as members but not a single bank from India,” Climate Risk Horizons CEO Ashish Fernandes said in a statement accompanying the report.

“The RBI has a key role to play in ensuring that Indian commercial banks treat climate change as the systemic economic threat that it is,” Fernandes added.

(Disclosure: Uday Kotak is among the distinguished founder-investors of ThePrint. Please click here for details on investors.)

Also read: Modi govt plans to rejuvenate 13 rivers, hopes it’ll boost forest cover & carbon sequestration


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