RBI, green finance and the blue planet: How are banks placed in all this?

The central bank's report seeks to nudge banks and financial institutions to catalyse risk mitigation from climate change

Last week, BNP Paribas said it will no longer bankroll new oil and gas fields, and stick to its target of an 80 per cent cut-back in such exposures by 2030. This must be seen in the context of the “Green Deal”, the flight path for the European Union (EU) to become climate-neutral by 2050; and the EU Commission’s announcement of €1 trillion in investments to pay for this journey. While no similar commitment has been made by Indian authorities, the ministry of environment, forest and climate change has put the cumulative expenditure for adapting to climate change at Rs 85.6 trillion (at 2011-12 prices) by 2030. The stakes are getting to be bigger.

The Reserve Bank of India (RBI) has aptly themed its latest Report on Currency and Finance (C&F: FY23), “Towards a Greener Cleaner India”. It has highlighted the impact of climate-change induced risks to macro-financial prospects, and the need for dedicated research to draw up a range of policy options to address them. In his foreword to the report, Governor Shaktikanta Das, noted: “Such research becomes even more critical in the context of the complexity and non-linearity of the ways in which climate, economy, financial systems and related policies operate.”

The International Monetary Fund’s INFORM Climate Risk Index -- an open-source risk assessment for crises and disasters – has stated that within BRICS (Brazil, Russia, India, China and South Africa) economies and the major advanced economies (AEs), India is most vulnerable to physical risks arising from them. In terms of preparedness and resilience to transition risks, while most AEs have high resilience and low exposure, BRICS is less resilient and highly exposed. India is the least resilient within it, and far less exposed than many. But on the greener side, the country is also the highest ranked by the G-20 in climate protection performance, according to the Climate Change Performance Index 2023.

How are Indian banks placed in all this?

Nearly 15 years ago, Mint Road issued a relatively little-read notification titled “Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting – Role of Banks”. It said the immediate environmental and social impacts of banking and finance are low, given that they are delivered through the activities of other businesses that rely on financial institutions. Despite the relatively indirect nature of their environmental and social impacts, banks need to examine the effects of their lending and investment decisions. It added a critical observation: Of the 200 signatories to the United Nations Environment Programme Finance Initiative (UNEP-FI), there was not a single Indian entity. It’s not as though India is faring better now, either: Of the 324 current signatories, you only have a single Indian entity – Yes Bank.

This aspect has to be seen in the light of the C&F: FY23 calling attention to the fact that the financial sector, while at the receiving end of climate risk, has the potential to catalyse risk mitigation. “It is, therefore, important to evaluate both these dimensions to design policies that could enhance the contribution of the sector to green transition while preserving financial stability.”

Mint Road may have to nudge its regulated entities harder on this front.

A January 2022 survey by the Sustainable Finance Group (in the RBI’s Department of Regulation) said that although banks have begun taking steps in climate risk and sustainable finance, concerted effort and further action is needed. A majority of banks surveyed did not have a separate business unit, or vertical for sustainability and ESG (environment, social and governance)-related initiatives. Only a few had a strategy for embedding ESG principles in their businesses, scaling up their sustainable finance portfolios, and incorporating climate change risks into their existing risk-management framework. As for board-level engagement on these issues, a third of the banks said, responsibility for overseeing such initiatives was yet to be assigned. Only a few had factored in ESG-linked “Key Performance Indicators” in the performance evaluation of their top management.

On May 22 and 29 (in New Delhi and Mumbai), the RBI plans to hold two-high powered meetings with the full-boards of state-run and private banks on governance, ethics, and supervisory expectations. It puts into the spotlight the RBI’s “Discussion Paper on Climate Risk and Sustainable Finance” (of July 27, 2022). Why? Because this paper is categorical that the board of directors would also have to exercise effective oversight on “risk management and controls and ensure that sufficient internal/external expertise is available for managing the financial risks arising from climate change and environmental degradation.”

It’s not incidental that Mint Road will be among the 13 regulators participating in the Global Financial Innovation Network (GFIN)’s first-ever 'Greenwashing TechSprint.’ The GFIN is a group of over 80 international organisations committed to supporting financial innovation in the interest of consumers and it is currently chaired by the autonomous Financial Conduct Authority based in the United Kingdom. The central bank will invite Indian firms to participate in “Greenwashing TechSprint”. Given that a number of investment products are being marketed as “green” and a growing number of exaggerated, misleading, or unsubstantiated sustainability claims about ESG credentials are growing, the RBI wants to ensure that these characteristics have some credibility.

The RBI’s logo is the tiger under the palm. For the sake of both, and the blue planet, synchronised steps towards making green finance credible are critical.