Forum Views - May 2023
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Global
FORUM VIEWS - MAY 2023
A new way to look at banking
Environmental and social risks have been a part of banking for a
considerable time, starting mainly with project lending.
Droughts can create repayment problems for farmer borrowers,
storms can destroy collateral value, environmental or labour-
related penalties can also create project risks. The increasing
severity of environmental anomalies and the improved
scientific understanding about them have highlighted such risks
and positioned them in the regulators’ agendas. Climate change
is probably the most well-known element of the environmental
crisis, but we should not forget other intertwined problems
such as the overuse of resources and the alarming loss in
biodiversity. India is particularly vulnerable to climate change-
related physical risks and there is a growing recognition that
financial institutions need to internalise risks early enough to
avoid impacts on their balance sheets in the near future.
However, there is more on the agenda of banks beyond risk
management. Instead of only looking at environmental and
social issues as potential risks for the banks’ own earnings, a
growing number of financiers take the so called double-
materiality perspective, in which the focus is on the impacts
that loans, investments or other financial transactions might
have on the people and our planet.
As countries are designing climate change policies around the
world, banks and other financial institutions are also
increasingly looking into these plans and pathways in order to
assess the aforementioned risks and also to understand what
the transition means for their business. For instance, the
Government of India, as part of its Nationally Determined
Contributions (NDCs), has set a target of a 45% reduction in
their emissions and a net zero target by 2070.
In the Indian context, the estimates of financial flows needed to
enable the energy transition vary depending on growth,
technology options, and systematic transitions across different
sectors. Estimates range from USD 6-8 trillion during the 2015-
2030 period to implement projects required to transform current
energy systems, to USD 10 trillion - 12 trillion to reach the 2070
net-zero goal. Even though these are just estimates and are not
directly comparable, they clearly indicate that climate finance
flows needed for mitigation are substantial and in the order of
tens of trillions by 2050. At the same time, climate finance for
adaptation needs in India are also estimated to be above INR
85.6 trillion or more than USD 1 trillion. Clearly, this magnitude
calls for the mobilizing of private finances towards the
achievement of the SDGs and the Paris Agreement Goals.
The sustainability challenge for the financial sector
Insights
RESPONSIBLE BANKING IN ASIA - HOW CAN BANKS BE
THE KEY ENABLERS OF THE SUSTAINABLE TRANSITION?
Gabor Gyura
Sustainable Finance Consultant
United Nations Environment
Programme Finance Initiative
(UNEP FI)
The Reserve Bank of India (RBI) has also recently highlighted
the importance of financial institutions as effective conduits for
channelling finance to carbon efficient sectors and industries in
alignment with national policies and goals, and has also
emphasised the need to improve the management of financial
risks in banks’ books which may originate from climate change.
In line with this stance, the RBI has taken policy steps and now
a number of important initiatives are underway that seek to
address and report on climate-related and environmental risks.
There seems to be a general consensus that banks and financial
institutions will play a key role in financing the transition to a
low-carbon economy and supporting the national climate
commitments in the country.
This “inside-out” perspective requires new types of skills and
expertise. Globally speaking, there are hundreds of thousands of
As countries are designing climate
change policies around the world,
banks and other financial institutions
are also increasingly looking into
these plans and pathways in order to
assess the aforementioned risks and
also to understand what the
transition means for their business.
(Budapest, Hungary)
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