A recent analysis by the Bengaluru-based think tank Climate Risk Horizons indicates that Indian banks are largely failing to strategically integrate climate risks into their core business models. The report, which assessed 35 Indian banks with a combined market capitalization of approximately ₹50 trillion, found that while some progress has been made, it is predominantly driven by Reserve Bank of India (RBI) regulations rather than a fundamental understanding of climate change's financial impacts.
Regulatory Compliance Over Strategic Action
The report highlights that while 92% of Indian banks now disclose Scope 1 and 2 emissions, and 63% obtain third-party verification, this reflects better regulatory compliance rather than a deep, strategy-driven approach. Leading performers identified in the report include Yes Bank, Union Bank of India, and Punjab National Bank.
“Banks are making slow progress, and most of it is being driven by RBI regulations. But the next step is just as important—banks need to understand more specifically how climate change is affecting their portfolios and overall financial health, and integrate that learning into their business behaviour,” said Anusha Das, lead author of the report.
Key Areas of Shortfall
- Financed Emissions: Only five banks disclose their financed emissions, which represent the majority of a bank’s overall climate impact.
- Coal Phase-out Policies: Just two banks, Federal Bank and RBL Bank, have published clear commitments to phase out coal financing. Union Bank of India has a limited, non-time-bound pledge.
- Net Zero Targets: A mere six out of 35 banks have set Net Zero targets. Of these, only State Bank of India and Punjab National Bank include Scope 3 emissions, which encompass indirect emissions from their value chain, including financed emissions.
- Board Oversight & Credit Decisions: While 34 banks report some board-level oversight of climate issues, only 22 demonstrate how this oversight influences credit decisions, portfolio alignment, or risk appetite.
- Climate Scenario Analysis: Fourteen banks report conducting climate scenario analysis or stress tests, but none disclose the resulting impacts on capital or assets, limiting the effectiveness of these exercises for risk management.
The Economic Imperative for Integration
The report emphasizes that the economic consequences of physical climate risks—such as floods, heatwaves, and droughts—are escalating. These risks directly affect borrower cash flows, collateral quality, and portfolio stability, making it critical for banks to move beyond treating climate concerns as peripheral sustainability issues.
“The economic impacts of physical climate risks such as floods, heat, and drought are worsening. Climate risks cannot be treated as peripheral sustainability concerns. They affect borrower cash flows, collateral quality, and portfolio stability. Indian banks now need to integrate adaptation and resilience into transition planning and support investments that strengthen resilience on the ground,” stated Sagar Asarpur, co-author of the report.
The Way Forward for Indian Banks
To address these shortcomings, the report calls for Indian banks to integrate climate risk into their core operations and strategic decision-making. This includes incorporating climate considerations into credit appraisal, pricing, portfolio limits, and capital planning. Furthermore, it recommends broader Scope 3 emissions disclosure, explicit commitments to halt new coal financing with clear timelines, and increased investment in climate data, tools, and internal capacity for robust risk assessment and supervisory reporting.
Ultimately, while RBI regulations have improved climate-related disclosures, the next crucial step for banks is to translate these disclosures into proactive risk management decisions that safeguard asset quality, enhance portfolio resilience, and ensure financial stability in a changing climate.