Physical Address
23,24,25 & 26, 2nd Floor, Software Technology Park India, Opp: Garware Stadium,MIDC, Chikalthana, Aurangabad, Maharashtra – 431001 India
As the global financial sector braces itself for the mounting risks posed by climate change, a new report titled “Unprepared” by Climate Risk Horizons (CRH) reveals a concerning reality: Indian banks are significantly behind in recognizing and managing climate-related financial risks. The findings highlight major gaps in environmental accountability and call for urgent systemic reforms to align Indian banks with sustainable development goals.
Key highlights of the report:
CRH assessed 35 of India’s largest scheduled commercial banks, including public sector, private sector, and small finance banks. Together, these institutions represent over ₹45 trillion in market capitalization as of March 2024. The study used a comprehensive climate risk framework to evaluate performance across key indicators such as emissions disclosure, climate policy integration, coal divestment, and green finance activities.
The results were sobering. Only a small fraction of banks have shown meaningful progress in adopting climate-resilient strategies. Most are either lagging or have no disclosed framework in place for assessing and mitigating climate risks.
Inadequate Emission Disclosures
One of the report’s most significant revelations is the poor state of emissions disclosures. Only seven out of the 35 banks assessed disclose all three tiers of greenhouse gas emissions—Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (emissions from financed activities and investments). This lack of transparency significantly hinders efforts to measure and manage the sector’s carbon footprint effectively.
The inability to track emissions, especially Scope 3, is particularly troubling since these represent the largest share of banks’ environmental impact, primarily through their lending and investment portfolios.
Weak Climate Risk Management Frameworks
Despite some banks aligning with international frameworks such as the Partnership for Carbon Accounting Financials (PCAF), the overall integration of climate risk into strategic decision-making remains minimal. Many banks do not include climate-related metrics in their credit appraisal or risk evaluation processes. As a result, they remain exposed to transition risks—such as sudden shifts in policy or technology—and physical risks like extreme weather events, both of which can severely impact asset quality.
Furthermore, while several banks have publicly expressed support for climate-related goals or adopted environmental, social, and governance (ESG) reporting, few have implemented detailed action plans or demonstrated measurable outcomes.
Green Finance Still on the Sidelines
The report also criticizes the limited role green finance plays in India’s banking sector. Although a few private institutions have started offering green bonds or dedicated sustainability-linked loans, these efforts are neither widespread nor significant in volume. Public sector banks, which hold a dominant share of India’s banking market, are particularly behind in channeling funds toward climate-resilient infrastructure and clean energy projects.
This underperformance is troubling, especially in the context of India’s broader commitments under the Paris Agreement and the country’s long-term net-zero goals.
Regulatory Gaps and the Need for Action
One of the central recommendations of the report is the need for stronger regulatory direction. While the Reserve Bank of India (RBI) has issued discussion papers and encouraged banks to begin climate risk assessments, clear mandates and enforceable disclosure standards are still lacking.
CRH stresses that without regulatory compulsion, voluntary action from banks will remain limited. It suggests that the RBI, in collaboration with the Ministry of Finance and other stakeholders, should issue binding guidelines for climate risk disclosures, set timelines for phasing out exposure to fossil fuels, and create incentives for green lending.
Capacity building is also a pressing need. Many banks lack the internal expertise to assess climate risks, let alone integrate them into their financial models. Training programs, technical assistance, and knowledge-sharing platforms will be vital for equipping banks to meet this emerging challenge.
A Way Forward: Aligning Finance with Sustainability
The report is a reflection of the current state of Indian banking. However, it also presents an opportunity. As the global financial system pivots toward sustainability, Indian banks can play a critical role in mobilizing the capital needed for a low-carbon future.
References:
https://www.wri.org/insights/3-reasons-whycapacity-building-critical-implementing-paris-agreement.
https://assets.bbhub.io/professional/sites/24/Energy-Transition-Investment-Trends-2024.pdf
Banner Image: Photo Disha Setia by on Pexels
