The Reserve Bank of India’s Sustainable Finance Group (SFG) has recommended 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.

This recommendation comes in the wake of a RBI Survey on Climate Risk and Sustainable Finance finding that Board-level engagement on climate risk and sustainable finance is inadequate.

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As per the survey, carried out by the Department of Regulation’s SFG in January among 12 public sector banks, 16 private sector banks and six foreign banks, responsibility for overseeing initiatives related to climate risk and sustainability was yet to be assigned in about a third of the banks, 

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.

In this regard, SFG suggested that banks could consider including KPIs on climate risk, sustainability and ESG as a part of the performance evaluation of their top management.

Risk management

SFG opined that banks need to fully grasp the physical, transition and liability risks associated with climate risk and also actively start managing them to make their loan and investment portfolios more resilient to such risks.

Further, banks need to develop a strategy for managing climate risk and integrating it into their risk management framework.

Almost all the surveyed banks recognised the urgency of risk management, and most of them considered climate-related financial risks to be a material threat to their business. Physical and transition risks were seen as the main sources of climate-related risks.

The Group said that some of the banks are not just considering climate and environment-related risks, rather they are also focusing on the social and governance aspects while evaluating credit proposals above a certain amount.

Quanitify portfolio susceptible to risk

A few banks are also attempting to quantify the amount of their loan and investment portfolio that is susceptible to such risks.

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.

The Group recommended 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.

“Most banks have launched a few loan products to tap the opportunities from climate change. A few banks have also launched green deposits to scale up lending to environment-friendly businesses,” per a report based on the survey.

The Group said banks need to align their climate-related financial disclosures with an internationally accepted framework to improve the comparability and consistency of the disclosures with their counterparts globally.