Financial institutions in India will have to integrate climate risk considerations in their investment decisions and portfolio management to mitigate impacts

Financial institutions in India will have to integrate climate risk considerations in their investment decisions and portfolio management to mitigate impacts 

India have lost over USD 80 billion in the 20 years to 2019 due to climate change and the losses could only multiply in the coming years, a recent report has said.

Businesses and investors need to be more proactive in incorporating climate risk considerations in their operations , along with the government, which needs to include climate change resilience initiatives in its policies, said the Climate Risk Mainstreaming; Approaches for Indian Financial Institutions report by the Shakti Sustainable Energy Foundation .

“The country has faced intense and increased events of floods, drought, cyclones, erratic rainfall, heat (and) water stress, which has impacted livelihoods, businesses, and thus the portfolio of financial institutions,” the report said. “Hence, it is important for financial institutions to rethink their financing strategies and deploy capital with careful consideration of climate risk mainstreaming strategies.”

The study carried out by Intellecap, a financial advisory, mapped the understanding of financial institutions in India on climate risk mainstreaming requirements as well as implementation strategies.

“As of now, Indian financial institutions do not have a specific strategy to manage risks induced by extreme weather events in their operations and portfolios,” said Santosh Kumar Singh, director, energy, agriculture and climate change, Intellecap. “A majority of financial institutions suggested that it will take another 3-4 years for them to develop and consider climate risk mainstreaming models for their investments.”

For instance, in its annual survey of energy transition in developing countries in Climatescope 2020, BloombergNEF found a 12% decline in clean energy investments in 2018-19 to USD 8.5 billion. The fall was as much as 32% since the peak of USD 12.6 billion in 2017.

Policy action

Realising the gravity of the situation, India’s environment ministry in December announced forming a high-level inter-ministerial Apex Committee for Implementation of Paris Agreement (AIPA).

“The purpose of the AIPA is to generate a coordinated response on climate change matters, which ensures that India is on track to meet its obligations under the Paris Agreement, including its Nationally Determined Contributions (NDCs),” the ministry said in a statement.

“Climate change must be fought not in silos but in an integrated, comprehensive and holistic way,” Prime Minister Narendra Modi said at the summit of G20 nations on November 22. “The entire world can progress faster if there is greater support of technology and finance to developing nations”.

Policy can play in coming up with climate solutions when calamities strike, Singh said. “One of the most critical aspects of managing climate risk is to understand the portfolio exposure to different sectors that are vulnerable to climate hazards and have both physical and transition risks. The next step is to disclose the exposures to these risks to larger stakeholders,” he said. “Once you start understanding and disclosing climate risk, then managing them and mainstreaming them follow.”

In the absence of any government mandate or push from the central bank, financial institutions have not been proactive in reporting exposure to climate risks or their exposure to different sectors that are vulnerable to climate hazards and risks, Singh said.

Mainstreaming climate risks

Government guidelines and regulations can push financial institutions to report their exposure to climate risks and make them act to mainstream climate risks in their portfolios and operations.

Government institutions such as the National Disaster Management Authority (NDMA) need to set up appropriate and dedicated climate collection data mechanisms in the country and make them available to relevant stakeholders. “These will act as inputs to scenario analysis,” Singh said. “Legitimate inputs are essential for accurate predictions and will greatly aid investors to initiate climate action.”

Climate change could cost businesses and investors across the world over USD 1.2 trillion over the next 15 years, the Intellicap report said. The private sector has a role in mitigating this, Singh said.

There has to be efforts to create climate risk indicators and modes of collecting relevant data required for climate risk modelling, which could be provided for consideration of everyone, he said. Insurance companies and credit rating agencies, for instance, could share knowledge and experience in managing climate risk owing to the nature of the business they are involved in, where it is essential to factor all important risks.

In 2015, a private sector led initiative called Climate-related Financial Disclosures (TCFD) was set-up in India to help develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.

TCFD recommendations are intended to help build considerations of the effects of climate change into routine business and financial decisions.

Responsibility and foresight

“Their adoption can help companies demonstrate responsibility and foresight. Also, better disclosure will lead to more informed and more efficient allocation of capital,” Singh said. “Overall, 1,500 organisations globally, including over 1,340 companies with a market capitalisation of USD 12.6 trillion and financial institutions responsible for assets of USD 150 trillion have expressed support for TCFD recommendations.”

Akin to the growth in the number of organisations supporting TCFD, investor demand for companies to report information in line with the TCFD recommendations has also grown dramatically, he said.

As part of Climate Action 100+, more than 500 investors with over USD 47 trillion in assets under management are engaging the world’s largest corporate greenhouse gas emitters to strengthen their climate-related disclosures by implementing the TCFD recommendations.

In addition, many large asset managers and asset owners have asked or encouraged investee companies to report in line with the TCFD recommendations and reflected this in their investment practices or policies.

Along with recommendations, the task force has issued guidance on two topics — conducting climate-related scenario analysis and integrating climate-related risks — into existing risk management processes and disclosing those processes.

Such metrics would help financial institutions understand the process of integrating climate risks along with understanding from other organizations that are part of TCFD recommendations, Singh said.