Sunit Arora looks at the urgency of a green transition for India, at what the Reserve Bank of India is planning to do and what this will mean for banks and for the development of a green economy
The most closely-watched annual prediction in India is the Indian Meteorological Department’s (IMD) forecast for the crucial summer monsoon. There’s been much discussion of late about the possible impact of El Nino, abnormal warming of surface waters in the Pacific. A few days ago, the IMD stuck to its earlier stance that the monsoon will be “normal”, but not so for northwestern parts. This comes soon after India faced abnormally high temperatures in February.
These weather numbers are not just rattling meteorologists. Right across India’s public policy ecosystem loud alarm bells have been ringing about the implications (and cost) of extreme climate events. The Reserve Bank of India, in its ‘Report on currency and finance 2022-23: towards a greener, cleaner India’, estimated that India’s green financing requirement will be at least 2.5% of gross domestic product annually till 2030. Cumulatively that would come to a staggering ₹85.6 trillion (c. £838 billion). And that’s at 2011-12 prices.
“India seems to be at the watermark of climate change,” warns the RBI’s research wing, stressing the need for systems and measures to mitigate the risks to banking and finance. While India has a history of structured policy responses to climate change, there’s a palpable uptick in urgency of late. “It is the increased frequency of extreme weather occurrences that is breaking the back of our capability to cope with natural disasters,” says the RBI report.
Green central bank
Like other central banks, the RBI is now working to manage the risk that climate change poses to financial stability.
In April 2023, the RBI introduced a framework for acceptance of “green deposits” by banks and non-banking financial companies (NBFCs). In January 2023, it issued, for the first time, sovereign green bonds (worth ₹80 billion or c. £784 million) to mobilise resources for green activities. (Half the bonds had a tenor five years with a coupon of 7.1% and the other were for ten years at 7.29%.) Late last year, the central bank discussed broad guidelines for climate risk and sustainability finance for all regulated entities (banks and NBFCs).
It’s not just disturbed weather conditions that have the RBI on alert. India’s banking system has a high exposure to energy, mining, mobility, industry and agriculture — all at risk from climate change. Historically, Indian banks have lent to basic metals producers and utilities, in particular. The RBI estimates these sectors may pose a higher climate credit risk for the banking system.
Then there are non-banking financial companies (NBFCs), the largest net borrowers from the financial sector. Half the gross credit of NBFCs is directed at the power and automobile sectors, which have high carbon footprints. Given NBFCs backward and forward linkages within the economy, the RBI has flagged potential systemic fault lines from large defaults that could be triggered by physical events or by transition to net zero.
Taxonomy tangle
What should India be doing to offset these risks? India’s finance and renewable energy ministries are working on a draft green taxonomy report to identify environmentally-sustainable economic activities. There’s an “urgent need” for green taxonomy in India, noted the recent RBI report. Indeed. There needs to be clarity on green activities to prevent “greenwashing” and help investors make good decisions. Companies, banks and financial institutions and supply chains have all expressed interest in having standardized and interoperable guidelines.
According to a Reuters report in January 2023, the Indian government is working on a draft policy that will certify green activities — and that will be loosely modeled on the European Union’s green classification system.
Of course there will be differences in approach. For instance, the EU places green investment disclosure obligations on companies and financial market participants. There is no such plan, yet, for Indian companies. As a first step, India’s stock exchange regulator has mandated that the top 1,000 companies by market capitalisation submit a Business Responsibility and Sustainability Report along with their annual returns.
The way ahead
Experts say there is a display of intent around managing climate risk, but a lack of granularity. Rules and regulations will have to be crafted. So, measurement of climate change risk remains a work in progress in India.
Still, there is a broad consensus on an internationally-harmonized taxonomy – which is crucial for the development of the green bond market. The initial issue of sovereign bonds didn’t attract many international investors, though the RBI waived the cap on foreign participation investment. It has been suggested that most international ESG bond investors have a preference for dollar-denominated debt and will take a ‘wait and see’ approach to the new bonds.
For banks, there is a need to codify the financial risks from climate stress in their books. For this they quickly need reliable data and disclosures. At this stage, the Task Force on Climate-related Financial Disclosures (TCFD) recommendations are the guiding light for the Indian ecosystem.
Though it’s early days, the RBI research wing also mooted price-based instruments like carbon taxes or emissions trading systems (the latter will be more acceptable politically). It has also suggested a new scheme to provide low-cost funds to banks for lending to renewable energy firms. Overall, banks should start channeling finance to carbon-efficient sectors.
Greenshoots
It helps that an enabling green environment is emerging. India’s clean technology story has come together “quietly, but steadily”, according to the Indus Valley Annual Report 2003. Renewables account for about 30% of installed power capacity. Thanks largely to solar energy, renewables have driven 75% of India’s capacity increase over the past six years. The Indian Ministry of Power wants the country to have 500 GW of “non-fossil fuel based” capacity by 2030, and cleaner fuel to be 50% of the installed capacity mix by 2030.
At the consumer level, a younger India (the median age is below 30) is displaying a preference for green solutions and products. Rooftop solar consumer brands have emerged in the state of Gujarat. Aided partly by subsidies, total electric vehicle (EV) sales in India crossed the landmark 10-million mark in 2022 (a piffling 4% of overall vehicle sales).
India’s banking ecosystem is scrambling to avoid being caught unawares by imminent changes ahead.
Sunit Arora is an independent journalist and editor based in Delhi. His twitter handle is @sunitarora