Mint BFSI Summit | Experts bat for green taxonomy to fuel climate finance in India

India’s climate financing activities need to be buttressed by a green taxonomy and new risk management models, said a panel of experts at the 17th edition of the Mint Annual BFSI Summit in Mumbai.

Panellists Vivek Iyer, partner and national leader of financial services-risk advisory at Grant Thornton Bharat; Rohit Inamdar, CEO of CareEdge ESG Ratings; and Shobhana Chawla, executive director (sustainable finance) at Standard Chartered Bank, discussed opportunities and challenges in climate finance.

A green taxonomy is essential to inform banks whether a project is green or not, said Inamdar. “Whatever we say on climate is meaningless unless, as a nation, we have a green taxonomy. We have set net-zero (emission) targets. Our green taxonomy has to align with those targets. The Reserve Bank of India’s (RBI) disclosure framework has to dovetail into the same,” he said.

A green taxonomy is a system of classification that helps identify whether investments are sustainable and environment-friendly.

Lenders also need to reassess their risk management models in the context of extreme weather events being the most critical risk, Inamdar added. 

“In the context of climate change and extreme weather events, banks are not going to have an option but to have their new models in place because if you look at the draft disclosure framework issued by the RBI (Reserve Bank of India) about a year ago, and we are expecting the final framework on disclosures within a month or two, that makes it mandatory for all regulated entities (REs) to make disclosures based on three pillars, from FY26 onwards,” he said, adding that these pillars are risk and strategy, governance, and risk management.

He said the RBI has asked lenders to assess risk and integrate that assessment into the credit decision-making process before pricing the loan appropriately.

Iyer of Grant Thornton Bharat echoed the sentiment about changing the risk management models in banks. “I know of a couple of banks using climate financing models from a risk management standpoint. Any risk management model is based on a set of variables, and the behaviour of each variable is based on what is your experience with respect to each one of the (extreme weather) events. The database of events is where a lot of banks struggle and make assumptions. But the good part is that there is innovation, and it is evolving and progressing,” he said.

Iyer said risk management models today focus on integrating climate risk by measuring the impact. “If you were to ask me, are those risk management models focused on creating those right kinds of risk assessments from a lending standpoint? No. That is not where a lot of the risk management focus is today. It is still evolving; nobody has got it right,” he said.

Policy changes

The panel’s remarks on climate financing followed the RBI’s policy changes to promote green investments, such as putting renewable energy investments into the priority sector lending category or introducing green bonds. 

According to Chawla of Standard Chartered, these were positive changes. “The government did the sovereign green bonds, which have spread awareness around the green finance market in India. The RBI has come up with some papers around green awareness,” said Chawla.

The volume of climate finance in the country, however, is low, she said. “The RBI says to finance the climate gap in India, we need money equivalent to about 2.5% of the GDP annually. Another report by the RBI said that last year, the financing to the sector, talking about renewable, etc., was 8% of the total financing by banks for the energy sector and half a per cent of total bank credit. The amount of financing being committed to this sector in India today is still very small,” she said.

Climate finance, however, is not just a local issue. Extreme weather events, perceived as critical risks, can impact all geographies. In times that call for adding more green investments to lenders’ portfolios, claims made by politicians such as US President-elect Donald Trump can hinder the cause.

When Mint‘s Alokesh Bhattacharya asked about the impact of Trump’s claims dismissing climate change as a hoax, Iyer of Grant Thornton Bharat said it would be a strategy by the US against Chinese dominance in the sector.

“Trump’s statements are directed towards creating a sentiment that has a destabilising effect on China. China has made significant investments in renewable energy—electric vehicles, solar panels, critical minerals and rare earths. There are a lot of investments made by them in the economy of tomorrow,” said Iyer, adding that Trump’s statement is likely to be a part of the geopolitical strategy that the US will leverage later.

Inamdar of CareEdge ESG Ratings said the US’s stance on climate change had completely changed over the last decade. However, India’s position on climate change has always been clear. 

“Prime Minister Narendra Modi stated in one of his UN speeches that India has taken many steps to mitigate climate change, showing India’s proactive stance and its resolve towards the problem. The US always had voices dissenting to ESG and sustainability. But in India, if the government is focused on this agenda and the regulator is also going to push the banking sector towards mitigating climate change, then things will progress,” he said.

Chawla noted that the regulator should incentivize climate financing in India, as is the practice in multiple other nations. “In the UK, the regulator offers certain incentives for banks to support climate finance. For example, a project finance deal that contributes to the public sector would typically get a capital relief of about 25%, making the commercials more attractive. And if the bank needed to choose between lending to brown vis-a-vis lending to green, then the choice is quite obvious,” she said.

“The Bank of Japan has a concessional line of credit for its banks for climate financing. The Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority have certain concessions or grants that support an issuer raising green finance in the market for the first time. So, whatever the compliance costs are, they are subsidized by the regulator. Some of these are things we can learn from or adapt to in the Indian context,” Chawla said.