Equipping the Indian financial sector with enhanced climate risk assessment

• Carbon-intensive sectors which make up 60% of emissions, collectively accounts for around 12% of all domestic currency bank lending and 40% of bank lending to large corporations
• While some frontrunning banks and development finance institutions (DFIs) are starting to include climate risks in their analytical models, the main challenges are knowledge gaps within finance professionals, inconsistent methodologies, high reporting costs and complicated review procedures
• A survey of current ESG and climate knowledge of finance professionals showed that less than 50% of the participating institutions systemically identify ESG and climate risks, while even fewer systematically use the data for decision making
• RBI is increasingly interested in adopting ESG frameworks and aligning with international standards. However, the current regulatory framework Annual Business Responsibility Reporting (ABRR), mandated by Securities and Exchange Board of India (SEBI), does not include environmental and transition risks
• The 2021 framework amendment – the Business Responsibility and Sustainability Reporting (BRSR), simply asks all businesses to identify material risks, with no specific guidelines for the financial sector

This project was unique in India since it brought together the financial system’s five critical actors (policymakers, regulators, state governments, banks and DFIs) to tackle climate-related financial risks.

The project conducted a landscape assessment to map the current knowledge of risk management and credit lending staff in the participating institutions. Of the finance professionals surveyed, findings highlighted knowledge gaps in ESG and climate risks across all targeted financial institutions, as well as the lack of systematic application of these concepts and methodologies to assess climate risks.

These results were critical in developing tailored content for training modules delivered to the targeted banks, with 196 staff in the risk management and credit lending departments of 10 Indian FIs attending training, including: Axis Bank, Bandhan Bank, HDFC Bank, ICICI Bank, IndusInd Bank, National Bank for Agriculture and Rural Development (NABARD), Punjab National Bank, SBI Mutual Fund, State Bank of India and SEWA Bank.

Additionally, the project supported RBI in formulating suitable regulatory options for more stringent supervisory and credit guidance policies. The recommendations included:

• Quantification of Indian banks' exposure to potentially stranded assets and non-performing loans, demonstrating the need for regulation to secure financial stability as the low-carbon transition accelerates
• Review of the RBI’s mandate to determine if and how climate change and ESG issues fall within its scope

The RBI’s available policy options were evaluated in the context of climate risks, referencing lessons from the Network for Greening of Financial Systems (NGFS) and adapting its recommendations to an Indian context.

The project successfully integrated GESI aspects throughout the training programme, aiming to equip the financial sectors with the concepts and tools to enable more gender and socially equitable investment decisions. As a result, GESI was integrated at each stage, from design to the delivery of the training programme:

• Landscape assessment – The mapping exercise to assess the current knowledge of participating institutions revealed that 60% of risk management and credit lending staff include some GESI measures in their risk assessment processes, and 63% of participating individuals felt that they had some knowledge of GESI issues. The results are based on 154 respondents, of which 55 were women
• Training modules design – Alongside dedicated definitions, standards, case studies and activities focused on GESI risks and opportunities, accompanying reading material was also provided. This includes GESI 'best practice' which includes the creation of lending schemes for women-led self-help groups by NABARD, RBL Bank's growing micro-banking loan book, and Small Industries Development Bank of India- SIDBI's Women Livelihood Bond
• Training session delivery – The project strived to encourage diversity in training participation; 34% of participants were women and 1.5% identified as a member of a disadvantaged group, despite operating in a sector which is largely male-dominated

More than ten Indian FIs now have the knowledge and tools to integrate climate risk and GESI considerations into investment and lending decisions, update their methodologies and strengthen staff capabilities across all teams.

Similarly, RBI has used the data and methods from the regulatory options paper to assess financial-sector exposure to transition risks. This will still require support to evaluate country-specific climate scenarios and their implications, ensuring stakeholders understand the potential risks from different rates of warming and decarbonisation.

Demand for further training for staff and additional topics of interest is also high. For example, ICICI Bank asked for additional training for their Indian and UK offices, while SEWA Bank requested further assessment to inform their training and strategy plans.