The ‘Draft Disclosure Framework on Climate Related Financial Risks’ released by the RBI in February enjoins financial institutions (FIs), such as banks, to provide the public detailed information on how they are addressing risks to their investments arising from the climate crisis. Big-ticket investments by FIs in sectors like infrastructure and energy face direct physical risks from environmental changes like rise in temperatures and sea levels besides extreme weather events. In addition, they face transition risks as global efforts shift towards low-carbon technologies, prodding the FIs to limit financing to carbon emitting activities and redirect them towards renewables.
The framework asks FIs to put in place climate related risk management mechanisms at the directorial level, devise strategy and processes and report them to the public from 2025. Further, the framework prompts FIs to report regularly on greenhouse gas emissions of activities financed by them and set targets for reduction.
In a globalised context, insufficient disclosure of climate risks may diminish a bank’s attractiveness to international investors. Public reporting on risk management frameworks and emissions is essential, but falls short of addressing climate, environmental and social risks posed by FI investments.
Impact risk perspective
Investments by FIs produce ‘risk’ in a double sense. One part of the story is the financial risk that arises from borrower projects’ exposure to climate change, market factors, poor asset management etc. At the same time, these investments may pose grave socio-economic, ecological and climate risks to the geographies and communities they inhabit.
For instance, Indian banks have heavily invested in projects such as the NTPC-run Tapovan-Vishnugad hydro power project in Uttarakhand, which locals and independent experts believe to be majorly responsible for the sinking of the religious town of Joshimath. The land subsidence in the mountain city has led to widespread displacement and collapse of houses and roads. Should not the financiers of such projects ascertain their share of responsibility?
Address polycrisis
Impacts of infrastructure and energy are not limited to carbon emissions. The framework does not address the risks engendered by projects funded by FIs on health, livelihoods, land, environment and climate. The point is to address the polycrisis that comprises climate emergency, environmental harms and socio-economic distress in insidious interdependence.
Integrating an impact risk perspective benefits affected communities, the environment and climate by aiding FIs in avoiding investments that may face opposition due to adverse outcomes. This approach, alongside assessing transition and climate-related financial risks, enhances accountability to the public, investors and depositors, potentially averting detrimental investments and fostering greater responsibility.
Enhance scope of disclosures
RBI’s disclosure framework for Regulated Entities (REs), that is banks and non-banking finance companies, focuses on greenhouse gas emissions but lacks project-specific transparency. Local communities and environmentalists often raise concerns about specific projects. That is where questions of accountability are most often relevant and raised effectively. Yet, for FIs it is not mandatory to disclose where their financing is deployed. To ensure accountability and comprehensive impact assessment, FIs should disclose the names of the projects and activities they finance.
Additionally, clear investment standards, goals and mechanisms are crucial. These could be modelled after international institutions like the International Finance Corporation’s Performance Standards, covering environmental, social and labour aspects. Mechanisms for disclosure and safeguards ensure compliance. Evolving India-specific standards is vital, given the impacts of climate change and social dynamics.
Investments in renewables call for greater oversight
Consider the race towards renewable energy in the Himalayas. It has sparked considerable interest from both foreign and Indian financial institutions. Nonetheless, this drive for eco-friendly power generation carries a hefty toll, not only in terms of finances but also in human terms. A prime illustration is the Chungthang dam in Sikkim, boasting a capacity of 1,200 Megawatts. Its construction cost was a staggering Rs 14,000 crore, exceeding the initial estimate of Rs 5,707 crore by three times. FIs such as Punjab National Bank, Canara Bank, Bank of Baroda and non-banking investors such as the India Infrastructure Finance Company Limited, India Renewable Energy Development Agency and REC Limited had provided finances to the project at different stages.
Despite vehement protests from indigenous communities, their apprehensions regarding the dam’s ramifications were disregarded. With temperatures on the rise, experts had long cautioned about the region’s susceptibility to Glacial Lake Outburst Floods (GLOFs) and seismic activity. Their forecasts were validated when an earthquake in 2011 inflicted damage on the dam, which was ultimately swept away by a GLOF last year.
Banks should conduct thorough assessments, engage stakeholders, and support smaller, community-led initiatives for more sustainable outcomes.
Beyond disclosures and financial risk
To ensure accountability in funded projects, a dedicated oversight institution is crucial, monitoring environmental and social standards from project approval to loan closure. This institution should conduct due diligence, monitoring and third-party assessments, maintain public records, advise clients and facilitate grievance redressal.
The RBI is best placed to propose a comprehensive safeguards framework for FIs, including cumulative impact assessments, transparency, stakeholder engagement, capacity building and effective grievance redressal mechanisms. Without formal space for raising objections or questions regarding a bank’s assessment, the idea of accountability fails to strike roots as FIs remain unanswerable.
The current disclosure framework focuses solely on climate-related financial risks within a bank’s investment portfolio, neglecting the broader environmental and social impacts of investments by FIs. This narrow perspective is seen as ironic and shortsighted, especially considering that the climate crisis is exacerbated by industrial and construction activities financed by these institutions. The framework needs to adopt a more holistic approach, recognising the polycrisis of climate, environment and affected communities. Failure to do so would represent a missed opportunity, as global trends emphasise the need for financial institutions to be accountable for all their impacts, not just carbon emissions.
(The author is a researcher at the Centre for Financial Accountability, New Delhi)