Adoption of ESG norms and sustainability goals in Indian banks
The Paris Agreement, adopted in 2015, has set a global goal to limit the increase in global temperature to well below 2 degrees Celsius above pre-industrial levels, and pursue efforts to limit the increase to 1.5 degrees Celsius. This has led to a renewed focus on environmental, social and governance (ESG) considerations in all sectors, including the banking industry. Banks play a critical role in the transition to a sustainable economy by providing financing and investment opportunities for sustainable projects and businesses.
The banking sector in India is one of the most important and powerful sectors of the economy. It plays a vital role in the economic development of the country by providing financial services to various sectors, such as agriculture, industry, and services. However, the sector has been facing several challenges in recent years, including rising non-performing assets (NPAs), the impact of digitalization, and the need to adopt ESG practices.
Prevalence of ESG norms in Indian Banks and the Challenges faced in Implementation.
The adoption of ESG practices in Indian banks have been relatively slow compared to other countries. However, there has been an increase in awareness and engagement with ESG issues among Indian banks in recent years. Despite this, there are still several challenges faced in the implementation of ESG practices in Indian banks. These include:
- A lack of standardization and transparency in ESG reporting: Indian banks need to improve their ESG reporting and disclose more information on their environmental and social impact. This will help investors and other stakeholders to better understand the bank’s performance and make more informed decisions.
- A lack of skilled personnel to manage ESG risks: Banks need to train their employees to better understand and manage ESG risks. This is particularly important for those employees who are responsible for risk management, lending, and investment decisions. Banks will require dedicated resources in this area to successfully tap the opportunities arising from climate change, sustainable finance and the growing focus on ESG.
- A lack of regulatory incentives to adopt ESG practices: Banks need regulatory incentives to adopt ESG practices. The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) need to develop a framework for ESG reporting and disclosure. This will help banks to better understand their ESG performance and take steps to improve it.
- Board-level engagement and responsibility: Board-level engagement on climate risk and sustainable finance is inadequate. At present, 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. 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.
- Moving towards a low-carbon environment in banking operations: As per RBI survey report (2022), most banks have either taken some measures or have plans to decrease the absolute carbon emissions arising from their operations and increase the proportion of renewable energy in their total sourced electricity. Banks could come out with a strategy to reduce emissions from their own operations. In line with India’s commitment at the COP26 Summit, banks may also consider working on a timeline to move towards net-zero emissions.
- Opportunities from transition to a green future: Banks could consider mobilizing new capital to scale up green lending and investment or set a target for incremental lending and investment for sustainable finance.
- Increasing transparency and disclosure of their ESG performance: Banks need to increase transparency and disclosure of their ESG performance. This will help investors and other stakeholders to better understand the bank’s performance and make more informed decisions. They also 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.
Additionally, Indian banks can collaborate with other stakeholders such as regulators, government, and industry associations to develop a common framework for ESG reporting and to provide training and resources for their employees to manage ESG risks.
Conclusion
The future outlook for Indian banks in terms of ESG adoption is positive. As global sustainable investment continues to increase, and as global regulations and investor expectations evolve, Indian banks will need to adapt and align their business models to meet these new requirements. Furthermore, the Indian government is also focusing on sustainable development, and has set up various policies like National Action Plan on Climate Change, which continuously encourages Indian banks to adopt ESG practices.
References
1.Report of the Survey on Climate Risk and Sustainable Finance by RBI (2022), https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1215
2. https://www.thehindubusinessline.com/opinion/the-salience-of-esg-for-indian-banks/article65243390.ece
3.https://bfsi.economictimes.indiatimes.com/news/banking/challenges-strategies-and-way-forward-esg-experts-advice-for-banks/90484017
4.https://www.businessworld.in/article/ESG-Is-An-Opportunity-For-Indian-Banks-CRISIL/14-07-2022-437143/
5.https://www.financialexpress.com/lifestyle/science/role-of-green-financing-in-supporting-esg-goals-of-india/2901387/
