Climate risk and sustainable finance have attracted the attention of regulators, national authorities and super-national authorities around the world.
Intergovernmental Panel on Climate Change The (IPCC) August 2021 report highlighted the observed changes in Earth’s climate in each region of the entire climate system.
The Survey on Climate Risk and Sustainable Finance, conducted in January this year, covered 34 major scheduled commercial banks, including 12 public sector banks, 16 private sector banks and 6 major foreign banks. IndiaThe reserve Bank of India said in a statement on Wednesday.
“The responses indicate that although banks have begun to take steps in the areas of climate risk and sustainable finance, concerted efforts and further action are required in this regard,” it said.
According to the findings, board-level participation on climate risk and sustainable finance is inadequate and for nearly a third of the banks surveyed, the responsibility of monitoring climate risk and sustainability-related initiatives was yet to be assigned.
In addition, only a few banks have included those related to climate risk, sustainability, environmental, social and governance (ESG). Key Performance Indicators (KPI) in the performance appraisal of your top management.
“Most of the banks did not have a separate business unit or scope for sustainability and ESG related initiatives,” it said.
RBI said that almost all the surveyed banks recognized the urgency of the issue, and most of them considered climate-related financial risks to be a material threat to their business.
Further, most of the banks surveyed have decided to gradually reduce their exposure to high carbon emitting/polluting businesses in the coming years.
Some banks have either raised fresh capital to increase green credit and investment or have set incremental credit and investment targets for sustainable finance. Most of the banks have launched some loan products to take advantage of the opportunities of climate change.
In addition, some banks have introduced green deposits to lend to eco-friendly businesses.
The survey also noted that most banks did not align their climate-related financial disclosure with any internationally accepted framework.
RBI stressed that banks need to set up a mechanism at the board or top management level to monitor and enhance initiatives related to climate risk and sustainability.
“They may consider incorporating KPIs on climate risk, sustainability and ESG as part of their top management’s performance assessment,” it said.
It also said that banks may consider raising fresh capital to enhance green lending and investment, or target incremental lending and investment for sustainable finance.
RBI suggested that banks may come out with a strategy to reduce emissions from their own operations.
In line with India’s commitment at the COP26 summit, banks may also consider working out a timeline to move towards net-zero emissions.
“The response from the survey will help shape the RBI’s regulatory and supervisory approach to climate risk and sustainable finance,” the central bank said.
In May 2021, RBI established a sustainable finance group (SFG) to lead efforts and regulatory initiatives in the areas of climate risk and sustainable finance.