A Reserve Bank survey has found that engagement of top management in banks on issues concerning climate risk and sustainable finance is “inadequate” and the lenders need to scale up initiatives on environmental matters.
Climate risk and sustainable finance has caught the attention of regulators, national authorities and supra-national authorities across the world.
The Intergovernmental Panel on Climate Change (IPCC) Report of August 2021 highlighted the changes being observed in the Earth’s climate in every region across the whole climate system.
The Survey on Climate Risk and Sustainable Finance conducted in January this year, covered 34 leading scheduled commercial banks, comprising 12 public sector banks, 16 private sector banks and 6 leading foreign banks in India, the RBI said in a statement on Wednesday.
“The responses indicate that although banks have begun taking steps in the area of climate risk and sustainable finance, there remains a need for concerted effort and further action in this regard,” it said.
As per the findings, board-level engagement on climate risk and sustainable finance is inadequate and for about a third of the banks that were surveyed, responsibility for overseeing initiatives related to climate risk and sustainability was yet to be assigned.
Furthermore, only a few banks have included climate risk, sustainability, environmental, social and governance (ESG) related Key Performance Indicators (KPIs) in the performance evaluation of their top management.
“A majority of the banks did not have a separate business unit or vertical for sustainability and ESG-related initiatives,” it said.
The RBI said almost all the surveyed banks recognised 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 surveyed banks have decided to gradually reduce their exposure to high-carbon emitting/polluting businesses in the coming years.
A few banks have either mobilised new capital to scale up green lending and investment or set a target for incremental lending and investment for sustainable finance. Most banks have launched a few loan products to tap the opportunities from climate change.
Also, a few banks have launched green deposits to scale up lending to environment-friendly businesses.
The survey also noted that a majority of the banks have not aligned their climate-related financial disclosures with any internationally accepted framework.
The RBI stressed that banks need to put in place a mechanism at either the board or top management level for overseeing and scaling up initiatives relating to climate risk and sustainability.
“They could consider including KPIs on climate risk, sustainability and ESG as a part of the performance evaluation of their top management,” it said.
It also said that banks could consider mobilising new capital to scale up green lending and investment or set a target for incremental lending and investment for sustainable finance.
Banks, the RBI suggested, could 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 on a timeline to move towards net-zero emissions.
“The feedback from the survey will help in shaping the regulatory and supervisory approach of the RBI to climate risk and sustainable finance,” the central bank said.
In May 2021, the RBI set up a Sustainable Finance Group (SFG) to lead the efforts and regulatory initiatives in the area of climate risk and sustainable finance.