Indian financial sector lags in embracing climate-linked investment calls

Banks and insurance companies in India have just begun to be asked difficult questions on climate finance in the domestic market, but those are still intermittent and mostly by foreign portfolio investors. This is, in fact, a bad fortnight to be even asking for it with another bad-loan mess coming up from the folding-up of Punjab and Maharashtra Cooperative Bank, and the possible collateral impact on a scheduled bank.

“We are still a long way off from other developed markets in asking for accountability on climate change-linked investment decisions,” said Vipul Dalal, one of India’s veteran investment analysts. 

A Bloomberg New Economy Global Survey notes just about 20 per cent of Indian business leaders “strongly agree” with the views of the majority of business professionals across the world who assert that by 2035, we will be reaching the point of no-return on climate change. Less than 50 per cent even agree that it is the tipping point. The corresponding percentages for United Kingdom, France and Germany are 64, 63 and 59.

Slow recognition 

The lack of enthusiasm to link climate issues with financial support could slow India’s push for renewables and supporting technologies for low carbon pathways, reckoned Saon Ray, senior fellow, at Delhi based think tank, Icrier who has just released her work on the subject “Low Carbon Pathways”.

The slow pace is matched by the government’s position too. In the run up to the UN’s Climate Action Summit in New York, the Indian finance ministry has issued a discussion paper on the subject: “Climate Summit for Enhanced Action: A Financial Perspective from India”. In his foreword to the paper, the secretary, department of economic affairs in the ministry noted, “The global action on climate change is subject to the delivery of timely and adequate finance. The worldwide call for stepping up climate actions will have to be matched with adequate provision of climate finance to developing countries.” 

In a dipstick survey of this author with domestic mutual funds, it was difficult to find anyone willing to stake out a aggressive position on climate positive funding. State-run Coal India does business with 19 banks in the country and, to a lesser extent, so do other coal companies. India is not a member of the global network of the “Central Banks and Supervisors Network for Greening the Financial System”. It is a G20 forum but from among the Brics nations, only China and South Africa are members. 

Yet, for instance, of the Rs 8 trillion of non-performing assets in the domestic banking sector, about Rs 2 trillion come from loans to power sector projects, which were mostly coal-fired. Similarly, as Indian insurance companies look to reinsure overseas their exposure to coal mining and power sector plants, they are facing tricky questions. Globally, the coal industry sponsors an annual insurance market worth about $6 billion. A more enthusiastic number is from Insuring Coal No More, the pressure group that tracks numbers for the sector. “Leading insurance companies have pulled $20 billion out of investments in coal and a growing number are refusing to underwrite new coal projects,” its website says.

As a S&P Global Ratings report says, risks of lending that do not take into account climate issues, have become costly. In a report, “Climate Change: Can Banks Weather The Effects?” released this month, the rating agency notes, “The global transition to lower carbon emissions poses a challenge to financial stability, due to physical and transition risk for banks, alongside operational and credit costs.” In short, Indian financial institutions too need to watch out for the impact of climate change on their portfolio. 

An example is from the auto sector portfolio of Indian banks. Lenders have been hit this year from their exposure to the automobile sector. Just the loans to dealers are estimated at over Rs 70,000 crore and a lot of these have gone sour. One of the reasons consumers are not buying cars is because their emission standards under BS IV will not be able to match what the traffic cops will insist on from April 2020 under the BS VI regime. Though the government has given a phase-out period for the existing stockpile to be valid till 2030, the slump is not getting cured. 

“Indian banks and insurance companies need to set a time frame within which they shall halt exposure to sectors with heavy carbon footprints,” said Praveen Gupta, former CEO of Raheja QBE General Insurance company. He says they need to start unwinding the clock on these sectors from now itself. QBE globally has decided to stop fresh insurance for the sector and phase out its entire thermal coal business by 2030. 

The S&P report warns that “Studies show that the value of global financial assets could drop and losses rise exponentially with the average increase in temperature between 2015 and 2100”.

Changes from abroad

The first set of changes have come to the insurance sector instead of banks. Reinsurance costs for Indian property are already high compared to other geographies due to the perceived risks of floods. Rates for 2020 have begun to stiffen even further. 

In response, domestic insurance companies have also begun to recognise the risks, but in a roundabout way. They have begun to raise the premium for natural calamities on most manufacturing sector companies, especially power. But Gupta says they should make the risks prohibitive enough to create an incentive for the switchover to climate-positive themes. 

Abroad, the Adani Group has faced problems getting an insurance cover for its Carmichael coal project in Australia. But that is unlikely to happen within India for a long time, though several reinsurers who do business with Indian companies have decided they will not support coal-related ventures. These include the big ones such as AXA, Allianz, Swiss Re, Munich Re and Generali.

A joint Marsh and RIMS report on the State of Risk Management in India puts climate risks as one of the top two. “These are present-day risks that are already of significant concern to organizations,” the report notes. It overshadows data fraud and cyber attacks as perceived risk. 

Some of the lessons are coming through and are not lost on the domestic banks. State Bank of India raised $650 million as a public green bond for financing climate-positive investments in September 2018, and is only the first bank in India to do so. 

Some of the mutual funds have picked up the environmental footprint, social impact and governance factors (ESG) of the companies they invest in. These are Kotak AMC, SBI Magnum Equity ESG Fund, Avendus India ESG Fund and Quantum India’s ESG Fund, but their portfolios are still thin. SBI’s limited bond action has brought it a “Green Bond Pioneer Award” from the Climate Bond Initiative for being the largest such issuer in the emerging markets. However, Navneet Munot CIO of SBI Mutual Fund is hopeful: “Environmental risks are bound to gain prominence in India….rising inequality, with poor literacy and human development index in a democratic society have the potential to creates risks for businesses as well.”

The S&P report adds, “The need for action could also present banks with a business opportunity. We see as positive regulators' initiatives to encourage banks to better quantify climate-related risks and embed them in strategy and risk appetite setting, as well as to improve and standardize data transparency”.