While serious statements promising steps to mitigate climate change and curb the emission of greenhouse gasses (GHG) are regularly delivered at international conferences on climate change, real movement on this front can only come when government policy is backed by the financial framework to push economic activity firmly in the direction of lower emissions. Banks, which finance business projects, therefore are the ones who are best placed to ensure, through activities financed by them, that GHG emissions meet the Paris Agreement goals.
India made a commitment at last year’s Glasgow Climate Meet that its target was to reach net-zero emissions by 2070 but its banks have shown slow progress in incorporating climate risks in their policy or work towards net-zero. According to a report released this month by voluntary organisation Climate Risk Horizons (CRH), the Indian banking sector as a whole remains largely unprepared to deal with the impacts of climate change.
For example, only 11 out of the 34 Indian Banks, that figure among the top 1,000 companies by market capitalisation listed on the Bombay Stock Exchange (BSE), had made significant progress in assessing material risks they face from the climate crisis.
Forward movement on incorporation of climate risks in business policies has been made only by a few banks and that too after prodding by the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). Most banks don’t have any policy regarding fossil-fuel use, emissions limits, climate scenario analysis, which could pose a serious threat to their asset base.
CRH carried out a survey of the 34 top banks and ranked them on the basis of 10 parameters including coal policy, scope emissions, verified emissions, climate scenario, climate risk management, green finance, membership of climate related international finance associations, exclusion policy and net-zero targets. The highest score achieved was 15 out of a maximum possible 20 points by Yes Bank—a private sector bank. SBI with 12 points was ranked sixth. At least 11 of these banks have no climate policy at all. The report said that public sector banks were found to be at greater risk of large capital shortfalls due to an adverse climate shock.
Extreme weather events, CRH points out, lead to substantial financial losses, which have implications for the stability and resilience of the Indian banking system. In 2022 extreme weather events battered India on 314 days claiming 3,026 lives and affecting at least 1.96 million hectares of crop area. Preparedness for climate risks means that they have to be measured and managed. And this is exactly where Indian banks are lagging.
Even this year calamities of flooding and landslides due to heavy rains struck the vital mountain states of Uttarakhand and Himachal Pradesh. In Himachal Pradesh more than 300 people have lost their lives, while entire buildings, including temples and homes, have collapsed in landslides. The chief minister of the latter state has put the estimate of financial loss to be as much as Rs. 10,000 crores.
If banks and other financial organisations wish to avoid the risks posed by extreme climate events, triggered by climate change, they must design policies regarding loans, investment and bonds in a way that either reduces or eliminates carbon emissions in keeping with internationally agreed climate commitments.
This is easier said than done though. According to data collected by CRH, many of the banks are in no position to carry out GHG accounting that will enable them to measure financed emissions, identify climate related transition risks and “set the baseline emissions for target-setting in alignment with the Paris Accord.”
Among the 10 parameters, a very critical one is becoming a member of international climate initiative associations through which experience and knowledge of climate accounting can be shared. The more prominent of these associations are Partnership for Carbon Accounting Financials (PCAF), Task Force on Climate-Related Financial Disclosures (TCFD), Carbon Disclosure Project (CDP), Science-Based Target initiative for Financial Institutions (SBTi-FI) and a few others. For Indian Banks PCAF, a Netherlands-based group, is most relevant. PCAF has developed a Global GHG Accounting and Reporting Standard for the Financial Industry to disclose GHG emissions associated with loans and investments. It provides a starting point for financial institutions to set science-based targets and align their portfolio with the Paris Climate Agreement.
GHG accounting refers to the processes required to measure the amount of GHGs [(CO₂, CH₄, N₂O, hydrofluorocarbons (HFCs), perfluorocarbons), sulphur hexafluoride (SF₆) and nitrogen trifluoride (NF₃)] or, for convenience, their CO₂ equivalents generated, avoided, or removed. These gasses are mandated by the Kyoto Protocol and are to be included in national inventories under the UN Framework Convention on Climate Change (UNFCCC). The GHG Protocol further breaks up these emissions into three categories known as scope 1, 2 and 3 according to their source. Scope 1 consists of direct emissions by an entity while scope 2 is made up of emissions due to its consumption of electricity, steam, heating, and cooling. These two are relatively easy to measure.
Scope 3 emissions, however, are a measure of emissions from the value chain of a reporting company, both upstream and downstream. Scope 3 emissions are difficult to measure as they are made up of a total of 15 activities—8 upstream and 7 downstream. But for financial institutions Scope 3 category 15 emissions are the most important part of their GHG emissions inventory.
According to data collected by CRH, only 10 of the 34 banks have started disclosing Scope 1 and 2 emissions, of which 8 have started to disclose some Scope 3 emissions as well. None of the banks have calculated the impact on their portfolios under different climate scenarios. As far as ‘green finance’ is concerned, only 10 banks have disclosed the quantum of green finance disbursed. Nine more banks have mentioned green finance without disclosing amounts disbursed. No bank has set a net-zero target that covers all three scope emissions.
CRH concludes that banks need to take concrete steps for achieving India’s climate goals that includes aggressive lending to advance the country’s energy transition targets and most importantly disclose figures for public scrutiny. Above all, they must ensure that the heavily fossil-fuel dependent industries financed by them develop science-based transition plans.