ADDRESSING CLIMATE RISK IN INDIAN BANKS: STRATEGIES FOR MITIGATION AND RESILIENCE

The financial sector faces a dual challenge: recalibrating operations and strategies to support the green transition while bolstering resilience against the increasing vulnerability to adverse climate events.

- Chetan Saraogi

This approach is crucial to safeguard financial stability. Estimates suggest that India requires at least 2.5% of its GDP annually in green financing to address infrastructure gaps exacerbated by climate events. The financial system must mobilize and reallocate resources effectively to contribute to the country's net-zero target. However, climate stress-tests reveal that public sector banks (PSBS) in India may be more vulnerable than private sector banks (PVBs).

Understanding Climate Risk

Climate risk encompasses the potential adverse effects of climate change on natural and human systems. As greenhouse gas emissions increase, the frequency and intensity of climate-related events such as extreme weather, rising sea levels, and changing precipitation patterns escalate. These changes pose significant risks to ecosystems, human health, and economies worldwide. Indian banks are not immune to these impacts, which threaten their asset quality, operational efficiency, and overall financial health.

In 2022, India experienced extreme weather events on 314 of 365 days. Despite this, major Indian banks have been unprepared to confront climate risks, according to a report by Climate Risk Horizons. This analysis, covering the year 2022-23, indicates significant gaps in the preparedness of the Indian banking sector to measure, manage, and mitigate climate risks. The study assessed the climate preparedness of India's 34 largest banks, with a combined market cap of Rs 29.5 trillion.

Key Findings

1. Inadequate Preparedness: Despite the accelerating impacts of climate change, significant gaps remain in the Indian banking sector's ability to handle climate risks. This includes a lack of clear policies and implementation plans for funding climate-related areas.