By balancing economic transition with climate adaptation, banks can better align with India's evolving needs and mitigate climate risks more effectively in the future.
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With the growing urgency of the climate crisis, all forces and consolidated efforts are required to build adaptation scenarios while continuing efforts for mitigation. The banking sector plays a crucial role in climate change mitigation & adaptation by financing activities that either contribute towards reducing greenhouse gas emissions or build resilience within the community. ‘Green finance’ or ‘climate finance’ is required to achieve the Sustainable Development Goals (SDGs) through investments in projects & sectors that reap environmental benefits.
According to the Green Climate Fund, ‘The Financial sector plays a fundamental role in mobilizing the resources necessary to finance a low carbon economy, both through their activity as financial intermediaries and their role within the creation and placement of negotiated instruments in the markets’.
For countries such as India, climate finance is required to strengthen infrastructure for development in sectors such as renewable energy, transportation (such as EVs), power, telecommunication, water management and sanitation.
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At the COP28 recently, the UAE Leaders Declaration was announced for the promotion of a global climate financing network. The declaration calls on countries & non-country stakeholders to ensure the doubling of adaptation finance to ensure that the $100 billion goal on climate finance is achieved.
Internationally, multilateral development banks (also known as the MDBs) provide low and middle-income countries that face adverse climate impacts with concessional and non-concessional funding. These group of MDBs include African Development Bank (AfDB), the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB), the Council of Europe Development Bank (CEB), the European Investment Bank (EIB), the World Bank Group (WBG) and others.
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Multilateral Development Banks
Financing is tracked through two components which include adaptation finance and financing from mitigation projects. In 2022, the multilateral development banks reported a total of $74.2 billion in financial commitments out of which $37.9 billion (51%) has been committed to low and middle-income economies across sectors and projects. In the same year, the MDBs also restructured their methodology for tracking adaptation finance. The new methodology as agreed promotes transparency in tracking, reporting and supporting climate action, in line with the principles & objectives of the Paris Agreement. As for the adaptation finance in 2022, 90% has been committed to low and middle-income countries out of a total of $ 25.2 billion. Apart from this, $38.8 billion was also allocated for high-income economies which are not towards specified projects.
The climate finance committed to by the MDBs has increased significantly from the years before. In 2020, the MDBs committed US $66,045 million out of which 76 per cent was dedicated to climate change mitigation and only 24 per cent was towards adaptation.
Financing for the Developing World
India has been a strong advocate for climate financing in the global economy. It has also worked on building its own climate financing infrastructure; however, its banking sector is unprepared to support climate action & tackle associated risks. An RBI survey in 2022 on Climate Risk and Sustainable Finance of the banking sector in India found that. The survey did not reflect a positive image of the India’s banking system in its readiness to manage climate risks and RBI made several recommendations to banks. In a new analysis in 2023 by Climate Risk Horizons, it was found that there hasn’t been any change since 2022. The key findings of the analysis revealed that only 10 out of the 34 banks surveyed have disclosed the quantum of green finance disbursements and only 8 have become part of climate initiatives such as UN principles of Responsible banking, Carbon Disclosure Project, Task Force on Climate-Related Financial Disclosures (TCFD), etc. None of the banks have yet set a net zero target.
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With India’s push for renewable energy and a global effort for phasing-out fossil fuel (at the recent COP28), banks now show reluctance in financing newly auctioned mines. According to the Ministry of Coal, in the last three years, 87 mines have been auctioned to private companies out of which only four are operating and the rest await financing. Financial institutions face pressure from the policy landscape of the country and an inclination towards renewables as well are the global demand to reduce exposure to fossil fuel. However, despite warnings from India’s central bank only Federal Bank Limited has excluded coal from its list for loans.
While the impact of climate economy dynamics on India's banking sector has become increasingly evident, there remains a pressing need for more substantive actions to integrate banking into climate financing initiatives. India continues to generate 73% of its power from the coal sector. Despite this urgency, India's heavy reliance on coal for power generation poses a significant challenge, as a sudden financial disengagement from the coal sector could disrupt the country's energy supply and impede its developmental goals.
Although the RBI has taken active measures for the banking sector in 2022, to promote sustainable financing, subsequent inaction by banks—particularly public sector institutions—underscores the urgency of mandating the banking sector to reallocate resources responsibly. By balancing economic transition with climate adaptation, banks can better align with India's evolving needs and mitigate climate risks more effectively in the future.
Author:
Anusha Arif is a research associate at the Social Policy Research Foundation (SPRF), New Delhi. Her work mainly focuses on climate change and sustainability. She is a policy researcher and lawyer with an LL.M. in Environment Law.
Anusha aims to bring valuable insight into climate change policy and related areas by addressing the world's complex challenges through her work.
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