Board-level engagement in banks on climate risk inadequate: RBI survey

Banks in India have begun taking steps in the area of climate risk and sustainable finance, yet the Board-level engagement on this count is inadequate. In about a third of the banks, responsibility for overseeing initiatives related to climate risk and sustainability was yet to be assigned, according to a Reserve Bank of India (RBI) survey.

Furthermore, only a few banks have included climate risk/sustainability/environmental, social and governance (ESG) related Key Performance Indicators (KPIs) in the performance evaluation of their top management, RBI survey said.

The central bank undertook survey on Climate Risk and Sustainable Finance in January 2022, covering 12 public sector banks, 16 private sector banks and six foreign banks. The survey was carried out to assess the approach, level of preparedness and progress made by leading scheduled commercial banks in managing climate risk.

It provides useful insights and the feedback from this exercise will help in shaping the regulatory and supervisory approach of the RBI to climate risk and sustainable finance.

RBI’s discussion paper on climate finance suggested Regulated Entities (REs) may have a committee/sub-panel at the Board level comprising experts from sustainability and risk domain with the following responsibilities. This panel could guide climate-related policy, strategy, objective-setting, and performance monitoring. It could mandate processes to identify and manage climate-related and environmental risks and opportunities.

The survey pointed out a majority of the banks did not have a separate business unit or vertical for sustainability and ESG-related initiatives. Only a few banks had a strategy for embedding ESG principles in their business, scaling up sustainable finance portfolios and incorporating climate change risks into existing risk management framework.

Almost all the surveyed banks recognized the urgency of the issue, and most of them considered climate-related financial risks to be a material threat to their business. Physical and transition risks were seen as the main sources of climate-related risks, the survey said.