RBI governor Shaktikanta Das greets the media as he arrives at a information convention in Mumbai, February 6, 2020. Photograph: Reuters/Francis Mascarenhas

• As of final yr, monetary establishments from India had been the third-largest buyers out of six international locations financing 80% of the world’s coal investments.
• A 2021 report discovered that ICICI, the State Financial institution of India, Axis Financial institution, Belief Group and HDFC had been among the many fourth-biggest group of financiers of coal-based initiatives worldwide.
• Indian business banks’ large-scale funding in Large Infra has uncovered the Indian folks’s financial savings and private investments to monetary danger.
• It has additionally made nearly each widespread individual with a financial savings account get together to initiatives that worsen the local weather disaster, displace folks and destroy livelihoods.
• A current RBI survey and dialogue paper spotlight potential programs for reform, but additionally strengthen the viewing of climate-related points when it comes to funding danger.

The most recent Reserve Financial institution of India (RBI) survey on ‘Local weather Danger and Sustainable Finance’ factors to the lengthy highway that business banks in India have to traverse in an effort to make their lending portfolio instrumental within the world response to the local weather disaster.

The survey factors out that hardly any banks incorporate efficiency indicators associated to setting, social and governance (ESG) standards within the analysis of their high administration. Most banks don’t have a separate vertical of their administrative construction to contemplate ESG-related initiatives and sustainable finance, nor had been they capable of current a transparent technique in direction of amplification of their sustainable finance portfolio or responding to local weather danger.

The survey, performed by the Sustainable Finance Group (SFG) of the Division of Regulation on the RBI, had the participation of 16 personal business banks, 12 public sector banks and 6 international banks. Based mostly on the survey, the SFG recommends capability constructing and incorporation of climate-risk evaluation as a part of the banks’ governance framework, and advocates bigger shares of the lending portfolio in direction of inexperienced financing.

This survey assumes added significance because it comes at a time when the Indian authorities has made formidable commitments on the world stage, typified by Prime Minister Narendra Modi’s panchamrit agenda introduced on the COP26 local weather talks in Glasgow final yr. Particularly, the nation has pledged to cut back emissions by 45% by 2030 and obtain net-zero by 2070.

Local weather finance is on the coronary heart of all these targets, which require transitioning to renewable vitality and investments in various infrastructure, which in flip makes monetary establishments like banks central to this endeavour.

The RBI’s initiative to take inventory of ESG measures adopted by banks is welcome and permits us a chance to grasp a quickly evolving area on the intersection of local weather change, finance and coverage.

Banks on the hearts of improvement and local weather finance

RBI’s dialogue paper based mostly on the survey rightly emphasises the “rising want for the monetary system to maneuver in direction of inexperienced financing, maintaining in thoughts the social and developmental goals of the nation”.

Whereas the popularity doesn’t result in the prescription of any obligatory coverage measures, it’s vital within the Indian state of affairs, the place local weather finance is almost absent from the nationwide discourse. That is additionally doubly ironic – on the one hand as a result of an unlimited part of India’s inhabitants instantly bears the well being and financial penalties of fluctuating temperatures, eroding coasts, melting glaciers and poisonous air, however on the opposite, actions in India have performed a pioneering position on the world stage in establishing the social and ecological accountability of banks for the ‘improvement’ initiatives they fund.

An oft-cited instance is of the motion towards the Sardar Sarovar Dam, which compelled the World Financial institution to withdraw its funding in view of the venture’s disastrous penalties of the venture. The central position of the monetary sector in intermediation and useful resource allocation thus makes it a vital participant in India’s progress in direction of being a sustainable economic system.

Reworking Indian banking

The RBI’s current encouragement of business banks in direction of green-financing is a paradoxical illustration of the transformation of Indian banking within the final 20 years. Deposit-driven business banking, which relies on folks’s personal financial savings, has step by step been pushed to bankroll capital and risk-intensive improvement initiatives by companies.

Noting this transformation, economist Jayati Ghosh had wrote nearly a decade in the past that

“… conventionally, business banks, which mobilise sources from the general public by means of comparatively small deposits that promise security and liquidity, don’t lend cash to initiatives involving lumpy, illiquid investments with lengthy gestation lags and comparatively excessive dangers. However the public business banks in India have been pushed over the previous decade to offer an increasing number of sources for such initiatives.”

Thus, Indian banks and non-banking finance establishments, such because the Life Insurance coverage Company (LIC) of India, have been funding excessive adverse-impact initiatives. The World Coal Exit Listing revealed final yr that monetary establishments from India had been the third-largest buyers out of six international locations financing 80% of the world’s coal investments, with shares and stakes in coal-based initiatives amounting to $55 billion1. Aside from LIC, the buyers included different public sector enterprises just like the State Financial institution of India in addition to personal banks and funding corporations.

Oilchange Worldwide, in its 2021 report on ‘How Central Banks Are Funding Local weather Disaster’, discovered that ICICI, the State Financial institution of India, Axis Financial institution, Belief Group and HDFC constituted the fourth-biggest financiers of coal-based initiatives worldwide.

Indian business banks’ large-scale funding in Large Infra has uncovered the Indian folks’s financial savings and private investments to monetary danger in addition to has made nearly each widespread individual with a financial savings account get together to initiatives that worsen the local weather disaster, displace folks and destroy livelihoods.

Affect danger over legal responsibility danger

Finally, the RBI dialogue paper dwells on the eventual query of danger. However its method of debate and framing is symptomatic of how the monetary sector has responded to the local weather disaster and its social penalties. The paper continues to strengthen the deleterious view of climate-related points solely when it comes to funding danger.

It will be significant for the monetary sector to have a look at doable protests towards, say, a mining venture or prices concerned in shifting from fossil fuels to renewable vitality – however when it comes to monetary danger, the size of the local weather emergency and its aftermath should make the compelling case that affect danger be prioritised over legal responsibility danger.

One instance of such prioritisation already exists in banks’ ‘exclusion lists’, the place they decide to not fund profitable sectors which have recognisably grave penalties for society and the setting, corresponding to arms-manufacturing and the tobacco trade.

Obligatory measures on local weather finance

Along with discussing dangers, the RBI survey and paper additionally recommend that “private and non-private sector banks might take into account aligning their climate-related monetary disclosures with a broadly accepted worldwide framework”. The central financial institution additionally proposes that business banks decide to targets concerning green-lending, primarily by investing in renewables and in direction of lowering carbon emissions.

The ESG is a metric-based reporting paradigm that quantifies affect and investments and encourages disclosure; helps regulators and banks earmark a portion of their lending to inexperienced finance; and construct analysis frameworks and supply incentives. So a query naturally arises: ought to banks take into account setting minimal obligatory standards vis-à-vis disclosure, funding, and thresholds for social and environmental standards for investments?

At current, the ESG commitments of most banks usually are not mandatorily applied – neither is the standards for every indicator well-defined. In current instances, some communities and quarters of civil society have been pushing banks to maneuver past ESG, in direction of a ‘safeguard regime’ that includes obligatory evaluation mechanisms, standards and thresholds for venture clearance and analysis; clauses associated to prior knowledgeable consent from doubtlessly affected communities; and a sturdy grievance-redress mechanism.

The SFG, and the RBI itself, have to this point seen themselves in an advisory position in the case of local weather finance, supposedly prioritising the ‘improvement’ wants of the nation. However this ‘improvement’ mannequin, which has change into synonymous with Large Infra leading to super-high income for a choose few, doesn’t entail an inclusive distribution of alternatives and advantages for everybody. On the similar time, it ensures that the implications of the local weather disaster and environmental degradation are borne by the hundreds of thousands who don’t possess sufficient sources to safe reduction from these penalties.

In order custodians of public cash, isn’t it time our banks prioritised the folks and the nation’s ecological well-being on this time of an unprecedented disaster?

Amitanshu Verma is a researcher on the Centre for Monetary Accountability, New Delhi, and might be contacted on Twitter at @amitanshujnu.