India Inc and climate: Janet Yellen's voice will boom louder John Kerry's

The aim: ensure banks and insurers across the globe adhere to "climate-responsible financing", thereby making it costlier for India and China to finance their fossil fuel needs

Beyond the meetings of John Kerry, the United States Special Presidential Envoy for Climate, with Indian government this week, there is a larger pressure group developing, that our banks, insurance companies and other financial institutions will have to tackle. It is happening through a series of meetings in quick succession by the US Treasury department to maintain the operation of the financial sectors of the EU, UK and the US to the same standards. Climate issues loom large at all these meetings. 

The most notable of these was the US-EU Joint Financial Regulatory Forum which met on March 24 and 25, for the first time after the new US team walked into the White House. It not only discussed green bond standards, of particular concern for India as one of the largest issuers globally, but also brought on the agenda to make both banking and insurance sectors adhere to “climate responsible financing”. The fallout is clear; make it more costly to finance fossil fuel across the globe. Both China and India could find themselves on the same side on who will set the standards for green bond issues. 

This week US Treasury Secretary, Janet Yellen told a largely Europe and America centric Coalition of Finance Ministers for Climate Action she “will encourage financial institutions (globally) to credibly align their portfolios and strategies with the objectives of the Paris Agreement”. India is not a member of the Coalition. 

It can’t be more specific. Through a series of steps being taken across the Atlantic reintegrating the fractured financial coordination, the costs for global finance could thus be rising for India’s traditional energy sector. This needs to be watched since all these reintegration, happening quickly are based on an increasingly common climate agenda.

After four years of silence, the Forum has used the word “climate” in the joint statement. It was tied in with another term—sustainable finance which, so far, was seen as a European concern. The Forum often leads the agenda for the G-20 discussions so one can expect a deep dive into both these issues at the final communique during the Italian presidency this year. 

Sustainable finance as India and other countries of the South see it, is setting up reasonably priced projects to transition from fossil fuel to renewable energy. The Indian financial system has not made any significant steps to deal with climate concerns beyond such levels. It is an especially difficult concern when the economy is opening up to liberal doses of foreign finance. India needs money to finance its gaping infrastructure holes. Making those subservient to climate concerns shall be challenging for India, much more than what Kerry could convey. 

That the Forum’s emphasis was no flash in the pan was made evident just days later. The US Federal Reserve made a presentation on climate change and its potential impact on financial stability, to the US Treasury Secretary, Janet Yellen. It was one of the just two issues discussed at the US government’s Financial Stability Oversight Council meeting (the other was about hedge funds). That the European entities are keen to make climate risks, front and centre of all their negotiations was well known. The Biden administration has also moved onto the same path wholeheartedly. 

Almost parallel to the US-EU Forum meeting, the US and UK insurance sector regulators met on the same day to operationalise  a treaty on the insurance sector. In essence the treaty gives insurers from both nations the advantage of being treated as local residents in each others’ country. The treaty was signed in 2018. At the first joint committee meeting between the two on “prudential measures regarding insurance and reinsurance”, the participants on both sides agreed they shall not insist on “collateral and local presence requirements for reinsurers and the provisions on group supervision measures”. It reduces the cost of insurance for companies from the world’s two leading insurance markets but it potentially binds them to common standards. It is no surprise that the entire Lloyds market has gone off financing of coal, recently.   

Yellen in fact made her climate focus even more explicit in her chat with European Commissioner for Financial Stability, Financial Services and Capital Markets Union Mairead McGuinness. Both talked of “close transatlantic financial regulatory cooperation” in other words offer the same options, globally.

Tougher times ahead for Indian firms

While Kerry may have no significant executive role to further the climate agenda within the Biden administration, (his is not strictly a cabinet position) the pressures for India mount from these key developments. 

For instance, despite being populated by the who’s who in the financial sector on both sides of the Atlantic, this particular US-EU Forum finds time to meet twice every year. The list of attendees include both the US Treasury and the Federal Reserve with the European Commission and the European Central Bank, who came face to face, virtually. Since there are plenty of differences within the EU on most financial topics, one can expect that in a meeting of such a disparate set of regulators, most of the two day meeting should possibly be only of the take note variety, barring a few. Yet the Forum’s signalling capacity is considered important enough for the UK, soon after Brexit to have switched on its own joint forum with the USA and plans to do likewise with the EU. 

US President Joe Biden waited for this meeting to be over before he pushed for his financial sector agenda including that for a threshold level of corporation taxes, across the globe. This could, however, work to the advantage of countries like India. If Biden wants to tax multinationals at a higher rate, he can scarcely demand that India drop its equalisation tax. It should not matter to him if the idea is to claw back profits from these companies whether they are  taxed by New Delhi or Washington DC. As a Seeking Alpha report noted this will “also touch on the ongoing friction in international taxation: whether to tax companies based on the locto deploy to further her choice of competing priorities in climate action.