Global temperatures soared to 1.49°C above pre-industrial levels in 2023, and are on course to be even higher for 2024, probably breaching the critical 1.5°C threshold. The most vulnerable nations already face potential credit downgrades and escalating financial instability. For the banking sector, this marks a pivotal moment—integrate climate risks into core strategies or face severe financial and reputational consequences.

For India, where key economic sectors such as agriculture, infrastructure, and energy are acutely vulnerable to climate shifts, the urgency to address climate risk is undeniable. Yet Indian banks are failing to adjust to this new reality, as the third version of our Unprepared analysis shows. Evaluating 35 large banks across 10 criteria, including coal divestment policies, financed emissions, and sustainable finance initiatives, the analysis shows that many banks are still in denial about the scale of the climate crisis and its impacts on their operations.

A Slow Shift from Coal
Coal financing remains a huge blind spot for Indian banks. Among the top 1000 BSE-listed banks as of March 2024, only Federal Bank and RBL Bank have adopted explicit coal exclusion or phase-out policies. The former plans to exit coal entirely by 2030, while the latter aims to cap thermal power exposure at 2.5% of its portfolio until FY 2026-27, with a complete phase-out by FY 2033-34.
The economics are clear: coal is no longer the cheap energy source it once was. Renewable energy and storage can now provide electricity at or below the cost of coal, with continued cost declines likely. Indian banks must act decisively to phase-out coal financing or risk not just their portfolios but the country’s energy transition trajectory.
Major banks like Indian Bank, HDFC Bank, IDFC First Bank, and Axis Bank have begun limiting exposure to carbon-intensive sectors, but still lack formalized coal exclusion strategies. Any growth in bank’s exposure to coal assets poses a long term risk to India’s climate targets and to banks’ own portfolio, due to the potential “stranded asset” risk.

Data Deficiencies and Patchy Emissions Disclosure

Emissions disclosure among Indian banks remains inconsistent and inadequate. Of 35 banks assessed, only eight report Scope 1, 2 and 3 emissions, with limited transparency on methodologies. While 20 banks disclose only Scope 1 and 2 emissions, which covers direct emission from owned or controlled sources (Scope 1) and indirect emissions from purchased electricity or energy use (Scope 2), others provide no emissions data.
Scope 3 emissions, representing all other indirect emissions across the value chain, including those financed through loan and investments, are the most significant for banks but remain largely unreported. The lack of borrower-level data, especially on Scope 3 financed emissions, is a critical barrier. Securities Exchange Board of India (SEBI)’s disclosure mandate applies only to the top 1,000 companies and excludes unlisted firms, leaving vast gaps in the financial system. Without comprehensive and verified data, banks cannot identify risks or allocate capital effectively.
Banks must adopt standard Scope 3 methodologies, such as those provided by the Partnership for Carbon Accounting Financials (PCAF), and regulators like SEBI must enforce third-party verification. These steps are essential to transform India’s banking sector from data-deficient to climate-ready.

Climate Scenario Analysis: Still in Infancy
Despite the Reserve Bank of India (RBI)’s 2022 pilot on climate vulnerability assessments highlighting the substantial credit risks that banks may face from extreme weather events and transition costs, Indian banks are still in the early stages of assessing their vulnerability to climate shocks. However, Kotak Mahindra Bank and IDFC First Bank have disclosed meaningful efforts in this area.
The newly announced Reserve Bank Climate Risk Information System (RB-CRIS) offers some hope. By integrating geospatial, meteorological, and financial data, it could enable Indian banks to develop India-specific climate scenarios and strengthen their resilience. However, its potential will only be realised if it is adopted widely and integrated into core banking operations.

Fragmented Approaches to Sustainable Financing
While Indian banks are stepping into sustainable financing, the lack of a common approach and comprehensive data hampers progress. While Federal Bank stands out with sector-wise disclosures in areas like energy-efficient buildings and renewable energy, most others fail to quantify their green financing contributions or provide detailed breakdowns, leaving their impact on India’s climate goals unclear.
The lack of a robust climate finance taxonomy remains a significant impediment. Without clear definitions and frameworks, banks struggle to differentiate between green and conventional finance in their disclosures. The RBI and the Ministry of Finance must urgently finalise the promised taxonomy, as announced in the Union Budget 2024-25, aligning with the upcoming Climate Scenario Guidelines and Draft Disclosure Framework on Climate-related Financial Risks, 2024.

The Capacity Building Challenge
Complying with new regulatory requirements, like the RBI’s draft climate risk disclosure framework, demands significant investment in workforce training, leadership development, and robust data infrastructure - areas where the sector is unprepared. As the regulatory requirements tighten, banks must leverage partnerships with international initiatives such as the UN Principles of Responsible Banking (PRB) and adopt Regulation Technology (Regtech) solutions to streamline compliance and integrate ESG criteria.
Indian banks are at a crossroads. Climate risks are no longer distant threats—they are immediate and growing. By failing to act, banks are not just jeopardising their financial stability and that of the Indian economy, but also missing an opportunity to lead India’s green transition.
Banks need to:

• Enhance emission disclosures, including Scope 3 financed emissions.
• Devise and implement time-bound coal phase-out strategies.
• Invest in India-specific climate stress testing and scenario analysis tools.
• Build capacity through partnerships, training, and cutting-edge technologies.
  

The stakes are high, but with decisive action, banks can transform from laggards to leaders in sustainable finance, driving India’s transition to a low-carbon future.