Global climate action: Indian banks need to accelerate green financing

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and financial institutions are lagging behind international financial institutions in helping control the climate crisis, research shows.

and financial institutions, including the State Bank of India (SBI), ICICI, Axis Bank, the Trust Group and HDFC, are among the largest global financial institutions funding projects. Meanwhile, several in other countries, including the Spain-based Banco Santander and the Commonwealth Bank of Australia, have promised to phase out financing of coal-powered plants and mining by 2030.

Banks play an important role in financing sustainable sectors such as renewable energy and in stopping financing of fossil fuels. But in India, banks have yet to implement policies to reduce their own emissions, or ask it of the companies that they finance, according to reports and an IndiaSpend analysis. Out of the eight that were assessed, only IDFC Bank (now called the IDFC First Bank) demonstrated a policy commitment to mitigating climate change, shows a 2019 report by Fair India, a coalition of civil society organisations working towards ensuring a sustainable financial sector in India.

This is the situation five years after India, along with 191 other countries, signed the Paris Agreement to limit greenhouse gas emissions and control the rise in world temperatures to 1.5-2 degrees Celsius.

“Some countries, clearly, have not focused on the banking sector as something they need to deal with as they phase out fossil fuels and transition to a renewable energy economy,” Alison Kirsch, lead researcher at the Rainforest Action Network, a US-based environmental organisation, and co-author of the report, ‘Banking on Climate Chaos’, told IndiaSpend. “Commercial banks are not ready to take action unless Central banks do not lead the way.”

In this story, we look at why the financial sector needs to help mitigate and what the Indian financial sector is doing.

Why banks must get involved in climate action

India has no plans to pull out completely from coal–the transition to clean energy will take a couple of decades. In May 2020, the government pushed for private investment in the costly, debt-ridden and highly polluting coal sector, which would mean financing from banks and financial institutions, and delay the sector prioritising the transition to renewable energy, IndiaSpend had reported in June 2020.

The United Nations Environment Programme issued Principles for Responsible Banking in 2019 to guide banks to consider the environmental and social impacts of the projects they lend to. These are also meant to help banks align their visions with the Sustainable Development Goals of 2015 and the Paris Climate Agreement.

Currently, 252 banks are signatories to these principles, with Yes Bank being the only one from India so far.

Separately, some non-banking institutional investors have signed on to a different set of principles, the Principles for Responsible Investment, to incorporate environment, social and corporate governance (ESG) into investment practices. SBI Funds Management Private Limited, Equicap Asia Management Private Limited and Indus Environmental Services Pvt. Ltd. from India became signatories in 2019.

The Reserve Bank of India’s role

The Bank of England and the European Central Bank have already formulated monetary policy addressing climate change, and central banks around the world are under pressure from civil society groups to take into account in formulating monetary policy.

The Reserve Bank of India (RBI) supervises all commercial banks, financial institutions and non-banking financial companies, and performs a wide range of functions to support national objectives, such as offering ‘priority sector lending’ to sectors such as renewables, agriculture and small and micro enterprises. In 2007, it issued a directive encouraging commercial banks to incorporate sustainability and corporate social responsibility into their business strategy.

“RBI has guidelines, which includes the amount they can lend, for banks to infrastructure projects like housing, renewable energy projects,” Anirban Chatterjee, former senior manager of Canara Bank, told IndiaSpend. For instance, the RBI included renewable energy in priority sector lending in March 2015 and increased the limits of lending in September 2020, which means that renewable energy developers can avail more loans than developers in other sectors. “But there are no guidelines limiting funding for projects,” Chatterjee added.

While issuing credit guidance to support renewable energy projects, the RBI has not taken any action, such as monetary policy or regulation, over tilting financial flows away from fossil fuels, as per the report titled ‘How Central Banks are fueling Climate Crisis’ by Oil Change International, a Washington D.C.-based research and advocacy organisation working to facilitate transition to renewable energy.

We have reached out to the RBI for a response, and will update this story when we receive a response.

In April 2021, the RBI also joined the Network for Greening of the Financial Systems, a group of central banks seeking to mobilise finance to support the transition to renewable energy projects and sustainable businesses.

“The RBI has signalled that it is waking up to the risks that climate disruption poses to the Indian economy, that should be a precursor to stronger oversight on Indian banks,” Ashish Fernandes, CEO at Climate Risk Horizon, a Bengaluru-based organisation working on the impact of the climate crisis on financial systems, told IndiaSpend. Banks should assess their vulnerability to risks and to long term disruptions because of the transition from fossil fuels to renewable energy, Fernandes explained. “But, it is important that banks should not wait for the RBI to move, given the urgency” of controlling the climate crisis.

Indian banks’ role in financing fossil fuels

Globally, banks have started taking harsh decisions when the companies they finance do not meet sustainability standards. In 2019, Citibank cancelled $140 million (about Rs 998 crore) of funds lent to Indonesian food giant Indofood after the company violated provisions of the Roundtable on Sustainable Palm Oil. Goldman Sachs has said it will not fund new Arctic drilling for oil and gas. Yet, both these banks were also among the largest investors in projects between 2016 and 2020, according to another August 2021 report, ‘Banking on Climate Chaos’, by Oil Change International.

Until now, over 100 financial institutions have announced their divestment from coal mining and/or coal-fired power plants, according to the Institute for Energy Economics and Financial Analysis, a US-based organisation working on energy markets, trends and policies. None of these are from India.

“Financing new fossil fuel infrastructure is going to be extremely risky going forward for Indian banks, both from a reputational point of view and because of the gathering pace of the transition to renewable energy and electrification of transport,” Fernandes said

Indian banks rank fourth globally in financing coal plants, providing $155.6 billion (about Rs 11.1 lakh crore, per 2019 rates) in loans between 2012 and 2019, according to the report, ‘How Central Banks are Fueling Climate Crisis’, by Oil Change International. The report used data of the 60 largest banks and 12 central banks from the Bloomberg Terminal that provides real-time data on financial markets.

As of March 2020, outstanding bank credit to the non-conventional energy sector was around Rs 36,543 crore, which is 7.9% of the outstanding bank credit to the power generation sector, compared to 5.4% in March 2015, according to the January 2021…

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