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Indian financial sector falling behind country’s climate ambitions, says study

A new report finds that India’s major financial institutions have limited understanding of environmental issues such as greenhouse gas emissions or transition risks.

Indian financial institutions are making limited efforts to manage low-carbon transition risks and are lending heavily to greenhouse gas emitters, according to a new study.

Just four of 10 major Indian financial institutions surveyed collect information on risks associated with environmental, social and governance factors, despite the government having set targets to decarbonise the economy – one of the world’s most polluting – by 2070.

The study was compiled by researchers from the Climate Bonds Initiative and advisory firm auctusESG, and led by Sarah Colenbrander, who directs think-tank Overseas Development Institute’s climate and sustainability programme.

Published in the Global Environmental Change journal, the study highlighted the Indian financial sector’s propensity to lend heavily to emissions-intensive areas, many of which are very highly indebted. The report pointed out that this financial risk is coupled with the potential shock of new climate regulations.

Only two of the institutions surveyed assess greenhouse gas emissions, pollution and environmental regulations, while none confirmed that they assess the physical risks of climate change. Less than half of the 154 finance professionals surveyed were familiar with environmental issues such as greenhouse gas emissions or transition risks. 

In addition to its net zero goal, India has set aggressive targets for the adoption of solar, wind and hydrogen energy, including lifting its renewable energy capacity to 500 gigawatts by 2030. 

“Its financial sector has just not kept pace with those ambitions,” Colenbrander told Sustainable Views.

Significant link between debt and emissions

Last year, 40 per cent of India’s installed electricity capacity come from non-fossil fuel sources, according to the Ministry of New and Renewable Energy. The country is one of the largest producers of renewable energy in the world.

The report, however, acknowledged the country’s ranking as the world’s third-largest greenhouse gas emitter.

It drew a significant link between India’s debt and its emissions and highlighted the associated transition risks, mapping around 70 per cent of the country’s outstanding debt to sectors in its emissions inventory. The report’s analysis covered approximately 90 per cent of India’s emissions.

Electricity production was the largest source of emissions, also making up around 5.2 per cent of outstanding credit lent by Indian banks, leading the report to warn that electricity production companies “potentially face very high transition risks”. The sector had the second-highest ratio of outstanding credit to “gross value added”.

Cement, iron and steel, and civil aviation were also among sectors listed with high emissions and debt levels.

“Firms in these sectors almost certainly pose a risk to their creditors as the low-carbon transition accelerates,” the report said.

It also noted transition risks associated with corporate bonds issued by electric utilities, which accounted for $15.4bn of India’s total outstanding corporate bond issuance. Of these electric utility bonds, 90.5 per cent are denominated in Indian rupees, and are likely to sit on the balance sheets of Indian mutual funds, insurance funds and banks, it added.

This implies that Indian financial institutions’ portfolios are “significantly exposed to transition risks given the large share of domestic currency corporate bonds issued by the power sector,” the report said, adding that “four-fifths of lending to this sector flows to utilities that generate power substantially or even exclusively from fossil fuels”.

Lack of data and understanding

With elements of India’s corporate bond market seemingly exposed to the nation’s big greenhouse gas emitters, and therefore the climate transition, the report also underlined a lack of data gathering and understanding within the country’s financial sector.

It interviewed 10 financial institutions that included most of India’s biggest banks, including the State Bank of India, laying bare a lack of data collection and understanding in this industry.

“Even if they did collect that data, we found that their staff – the risk and credit officers we interviewed – wouldn’t know what to do with that data,” Colenbrander said. 

Just one in six had experience of using this information when allocating money, such as changing the price of a loan to industries in response to whether they are using green or brown technology, she continued.

None of the respondents regarded jobs such as chief sustainability officer or corporate governance officer to have the main responsibility for ESG or climate issues, with responsibility for these areas lying with different parts of their businesses and at varying levels of seniority. 

Only two institutions confirmed links between ESG and management compensation. In the UK, 45 per cent of FTSE 100 companies include ESG targets in annual bonuses.

The Reserve Bank of India has yet to introduce guidelines – voluntary or mandatory – concerning the physical or transition risks of climate change, Colenbrander said, adding that it is in the process of developing these frameworks. 

This does not suggest, however, that India is significantly lagging other central banks, she said, noting that the “frontrunners” – which Colenbrander regarded as the UK, French and Dutch central banks – had only introduced compulsory climate risk disclosure requirements in the past couple of years.

“It’s not that India is that far behind, but that most central banks are really not ready for this.” 

Photo credit: Andrey Rudakov/Bloomberg

A service from the Financial Times