India’s big banks not ready for unfolding climate crisis
India’s major banks remain unprepared to confront climate risks, according to new analysis by think tank Climate Risk Horizons. The report titled Still Unprepared builds on a 2022 assessment, and finds that despite the accelerating impacts of climate change, there remain significant gaps in the preparedness of the Indian banking sector to measure, manage and mitigate climate risks. The analysis finds little progress towards climate-preparedness among India’s 34 largest banks that have a combined market cap of ₹29.5 trillion.
“In 2022, extreme weather events battered India on 314 out of 365 days. These floods, heat waves and other extremes are exacting a financial toll, and the science tells us that with carbon emissions continuing to rise, things will get worse before they get better. This is not just an ecological issue, it has real financial consequences for the Indian economy and for investors' portfolios - banks need to start treating it as such,” said Sagar Asapur, Head of Sustainable FInance for Climate Risk Horizons and report author.
The analysis ranks banks on several criteria including a Fossil Fuel Exclusion Policy, Emissions Disclosure, Climate scenario analysis and Net Zero Targets. While Yes Bank, HDFC Bank, and Axis Bank have emerged as the top three performers in climate-risk preparedness, Indusind bank has slipped down four places since the last assessment.
Suryoday Small Finance Bank and Federal Bank continue to be the only banks that have a policy against financing new coal projects, one of the leading sources of greenhouse gas emissions. Since the last assessment in March 2022, eight banks have started disclosing some Scope 3 emissions (emissions that are an indirect result of the bank’s activities) in addition to Scope 1 and 2.
Yes Bank remains the only bank to measure its financed emissions, but this too is only for the electricity sector. YES Bank is also the only bank to have explicitly identified climate risk as a Pillar 2 risk under its Internal Capital Adequacy Assessment Process (ICAAP). At a time when climate disruption in the form of extreme weather events has hit new extremes, not a single bank has yet undertaken climate-related scenario analyses to gauge the resiliency of their portfolios.
The report also finds that public banks in particular are failing to adequately finance India’s energy transition. For example, public sector banks have accounted for less than 8% of total financing for the renewable energy sector. Only 10 banks have disclosed their green financing activities.
The Reserve Bank of India has accepted that the climate crisis could pose a systemic risk to the Indian economy. The CRH analysis maps the potential climate change risks faced by India’s banking sector based on sector-wise exposure, and emphasises the need for mandatory guidelines from the RBI on climate-related disclosures and common frameworks to manage climate risks. For instance, based on disclosures of India’s 30 largest banks, SBI and HDFC Bank have the highest exposure to carbon intensive sectors with SBI’s exposure dominated by coal.
“It has been more than a year since the RBI released a draft discussion paper on climate risk and sustainable finance for public comment. However, nothing has been finalised yet. Also, the RBI should classify and differentiate risks, and start mapping climate risk drivers to financial exposures under traditional risk categories” said Asapur.
The study lists proactive disclosure of green finances, adoption of a common reporting format, transition plans for their fossil fuel financing and the use of tools like climate scenario analyses as urgent steps required to be taken by banks to mitigate climate risks.