With India agreeing to achieve net-zero emissions by 2070, the onus is on banks to promote green finance. The Indian Banks’ Association is looking to create a common framework for environmental, social and governance (ESG) issues while carrying out credit assessment and include climate risk as part of their risk management policy, according to a report.
Banks have always been the backbone of India’s economic growth, and as the country pivots to sustainable growth, the banking sector will have to accelerate green lending, SBI Chairman Dinesh Khara had said earlier.
“A formal definition of green finance in India would enable more precise tracking of finance flows to the green sectors, which in turn would help design effective policy regulations and institutional mechanisms directed towards increasing both public and private investment in green sectors,” Khara had said.
Green finance definition
India’s green finance definition could be formed through a combination of adopting international practices, developing a set of principles for green economic activities and obtaining stakeholders’ views, he suggested.
“Unless banks are able to provide adequate credit to green projects and measure risk in their portfolio, the bank’s depositors and shareholders will continue to carry ESG (environmental, social and governance) risk that can erode returns.”
To support acceleration and green financing, he said, a number of structural changes will be needed in the traditional lending approach, including evaluation and certification of the green credentials of each project and understanding of the corporate road map to achieve net zero.
RBI‘s stance
The Reserve Bank of India also feels there is a need to mainstream green finance and devise ways for incorporating environmental impact into commercial lending decisions.
Addressing climate risk in the financial sector should be the joint responsibility of stakeholders as it would affect the resilience of the financial system in the long run, RBI Deputy Governor M Rajeshwar Rao said recently.
“As the risks and opportunities and financial impact arising from climate change vary across jurisdictions, this poses unique considerations for emerging economies like India. The challenge before us is to mainstream green finance and think of ways to incorporate the environmental impact into commercial lending decisions while simultaneously balancing the needs of credit expansion, economic growth and social development,” Rao said.
He noted that the global understanding of the systemic impact of climate change on the economy and the financial system as also its resultant impact on financial stability is evolving and, accordingly, the responses of central banks and supervisors around the world have also been developing.
RBI’s efforts
The RBI has been talking about green finance for many years and has taken various steps towards it. It has pushed, on the lines of corporate social responsibility for private companies, the concept of ESG principles into financing aspects. In April, the RBI joined the Network for Greening the Financial System (NGFS) in April 2021.
The NGFS, launched in December 2017 at the Paris One Planet Summit, is a group of central banks and supervisors from across the globe to share the best practices and contribute to the development of the environment and climate risk management in the financial sector. It is an institutional yet voluntary membership, which will also help mobilise mainstream finance to support the transition toward a sustainable economy.
“The RBI expects to benefit from the membership of NGFS by learning from member central banks and regulators and contributing to the global efforts on green finance and the broader context of environmentally sustainable development,” Rao had said in the speech.
NGFS and the Basel Committee on Banking Supervision’s Task Force on Climate-related Financial Risks (TFCR). RBI being a Basel Committee member was already part of TFCR.
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