RBI should provide regulatory clarity on climate-related risks to banks: Analysis

With climate change posing increasing risk to the banking sector, a new analysis highlighted the need for regulatory clarity from the Reserve Bank of India (RBI) to guide banks in identifying, assessing, and managing climate-related risks.

The 2024 edition of the banking report by the think tank Climate Risk Horizons assesses the progress of climate-risk preparedness of 35 Indian banks. It recommends the issuance of a formal climate finance taxonomy and government-backed guarantees, subsidies, and tax incentives to mitigate lending risks for green projects.

The analysis ranks banks on ten criteria including a Coal Exclusion Policy, Emissions Disclosure, Climate scenario analysis and Net Zero Targets. Yes bank, IDFC bank, and HDFC bank stood out as the leading performers.

Despite some progress in Climate Risk Management, the report finds a significant lag in action by banks on critical areas such as having a Coal Policy, disclosing their Financed Emissions (Scope 3, Category 15) and having Net-Zero Targets.

RBL Bank and Federal Bank are the only banks that have a coal exclusion policy and have committed to stop financing coal projects by 2030 and 2033 respectively. Only three banks disclosed the amount of emissions they directly financed, with most other banks still developing processes for measurement. Of the 35 banks assessed, only six have set net zero targets and 25 banks are yet to disclose any climate action plans.

“Climate change and the frequency of extreme weather events in India are accelerating far faster than banks are advancing their climate risk preparedness. Many banks still lack board-level oversight of climate/ESG risks, and many do not disclose all their scope emissions or have a target to reduce them,” said Anusha Das, co-author of the report.

Climate risk management practices have gained traction with 16 out of 35 banks having dedicated ESG risk/climate risk committees or policies at the board level. The report also reveals a growing awareness of climate risk assessments among Indian banks with 13 banks have initiated climate scenario analyses, and two—Kotak Mahindra Bank and IDFC First Bank—have conducted climate stress tests with detailed disclosures.

This is a significant improvement from the previous year when no bank was in the advanced stage of conducting climate scenario analyses.