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India's central bank pushes banks to align disclosures with global climate norms

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India's central bank pushes banks to align disclosures with global climate norms

India's central bank is asking lenders to align their climate-related financial disclosures with global norms and embrace climate risk management after it found that most do not follow any internationally accepted framework.

Indian lenders have started taking steps on climate risk mitigation and sustainable finance, but the Reserve Bank of India found in a survey that a "concerted effort and further action" is still needed. Only a few banks had a strategy to embed environmental, social and corporate governance principles in their businesses and scale up their sustainable finance portfolio, the central bank said July 27, citing results of a survey it conducted in January.

"The natural disasters impacting India and the world, in general, have underscored the need for urgent action to address the ongoing climate emergency," said Damandeep Singh Ahluwalia, partner for climate change and sustainability in India at consulting firm EY. "Infrastructure and crucial assets are at risk, which needs to be addressed and safeguarded."

India is seeking to double down on climate mitigation after it became among the last major global economies to commit to a net-zero emissions target in 2022. The South Asian nation is among the world's biggest polluters, though its per-capita emissions are significantly lower than developed economies. Still, financial institutions in India have subpar involvement in green finance, deterred by a lack of demand and a dearth of investors in green bonds. Most green initiatives in India have so far come from companies in the renewable energy space.

Lack of standards

Indian banks have been struggling with an array of different definitions and quantification methods on climate impact, Ahluwalia said, noting that the nation's lenders reported climate risks of about $84 billion in 2020 and that the figure dropped to less than half in 2021. "Clearly, a better definition and quantification methodology will help get a clearer picture of the enormity of the risk and help policymakers," Ahluwalia added.

Regulated entities in India can explore aligning their climate-related financial disclosures with the Financial Stability Board's Task Force on Climate-related Financial Disclosures, according to the central bank's draft guidelines.

Not including climate risks in credit underwriting makes banks susceptible to the transitional and physical risks of climate change, said Shantanu Srivastava, India-based energy finance analyst at the Institute for Energy Economics and Financial Analysis. "There is potential for significant impact on the lending books of banks, especially in a country like India which is highly prone to physical effects of climate change," Srivastava added.

An underappreciation of the opportunities created through the energy transition, such as the rollout of green loans and differential rates for net-zero aligned activities, could mean loss of business for banks, Srivastava said.

Climate change impact

"With the increasing threat of climate change and the associated physical damage, change in market perception and shift in preferences towards more environmental-friendly products and services, the financial, reputational and strategic risk implications are becoming increasingly prominent," the Reserve Bank of India said.

Since the middle of the 20th century, India has witnessed a rise in average temperature, decrease in monsoon precipitation, more droughts, changing sea levels and increasing frequency and intensity of severe cyclones, the central bank said, citing a government report. There is compelling scientific evidence that human activities have influenced these changes in regional climate, it said, adding that these changes pose challenges for humanity and warrant large-scale and rapid reduction in greenhouse gas emissions.

"Indian businesses are particularly exposed to the physical risks of climate change," said Jessica Ha, associate at Hong Kong-based law firm Ben McQuhae & Co., noting that India is the seventh-most climate-vulnerable country according to the Global Climate Risk Index 2021. "This may roll into credit risks for Indian banks, so there is exigency for Indian banks to scale up and develop robust climate risk mitigation strategies for their businesses."

Feedback from the survey will help shape the regulatory and supervisory approach of the central bank to climate risk and sustainable finance, the Reserve Bank of India said. Simultaneously, it published a discussion paper on climate risk and sustainable finance, seeking views from the industry on a set of good practices it wants regulated entities in India to follow to manage the risks and opportunities that may arise from climate change and environmental degradation.

Moreover, banks can tap the expected growth in demand for green finance by mobilizing new capital, or setting targets for incremental lending and investment for sustainable finance, the central bank said.