Page 49 - Banking Finance November 2022

ARTICLE

that falls in the production processes of industries that are India by market capitalisation to report Business
directly or indirectly exposed to excessive use of fossil fuel. Responsibility and Sustainability Report (BRSR) starting from
the financial year 2022-23.
Both these risks, arising out of climate related factors may
eventually get manifested through traditional risk channels The reporting is expected to bring in greater transparency
namely: (1) credit risk either due to reduced borrower's ability and enable market participants to identify and assess
to repay and service debt or bank's inability to fully recover sustainability-related risks and opportunities, including
the loan because of default ; (2) market risk, say, due to climate risks. In the slew of these developments, a recent
reduction in the financial value of assets, and/or re-pricing of proposal by SEC (Securities and Exchange Commission)
securities and derivatives due to stringent climate regulation; floated in March 2022 in the US on climate-related disclosure
(3) liquidity risks on account of banks' reduced access to stable rules for public companies, which includes banks and other
source of funding because of changing market conditions; (4) financial services groups, also deserves special mention.
operational risk due to legal and compliance risk pertaining
to climate-sensitive investment; and finally (5) reputational Although the wind has started to blow in the right direction,
risk due to changes in market and consumer sentiment due a critical question that remains to be explored in the Indian
to changing consciousness on climate. context is whether the stakeholders in the BFSI sector,
especially the banks, are ready to internalise climate risk.
As traditional risk management approaches are not A recent survey in March 2022 by Climate Risk Horizons
appropriate for measuring climate risks, regulatory (CRH), a think-tank, analysed 34 largest scheduled
authorities and businesses have opted for stress tests to commercial banks in India by market capitalisation on the
assess the extent of a firms' vulnerability to climate change. Bombay Stock Exchange (BSE) representing ?26.81 trillion
as on March 31, 2021. They inferred that only a handful of
Global experience Indian banks have factored in climate risk, albeit only
partially, in their business strategies.
The frontrunners in that direction include The Netherlands,
France, Banking Union in Europe, the UK, Australia,
Challenges for banks
Singapore, and Canada.
Internalisation of climate risk factors by banks is very much
In Asia, the Hong Kong Monetary Authority has also started on the agenda especially with RBI taking up the cudgels.
publishing climate risk guidelines and announcing future However, given the complexity in climate risk modelling, the
climate stress tests. The scenario in the BFSI sector globally biggest challenge for a bank would be to measure the impact
is also progressively transforming to align with the of climate risk while undertaking lending and investment
imperative of internalising climate risk. decisions and further integrating that risk in the existing risk
and valuation frameworks.
For instance, De Nederlandsche Bank (DNB) established a
Climate Risk Working Group in 2016 and People's Bank of According to a recent Bloomberg survey for European banks,
China (PBC) standardised green disclosures and green credit most banks reported that they could only confine themselves
ratings since 2018. The Financial Stability Board (FSB) to a qualitative assessment of climate risks during the loan
created an industry-led Task Force on Climate-related approval processes, which could at best be considered as
Financial Disclosures (TCFD) to bring out climate-related subjective. The quantification of climate risk, albeit crucial,
information that are financially material. may require quality data that is not always available due to
inadequate and at times inconsistent corporate disclosure.
Climate risks also find ample recognition in the European The second challenge that a bank faces is dearth of
Central Bank's (ECB) supervisory risk assessment and in the standardised industry models to embed climate risk into
Climate Financial Risk Forum (CFRF) established by the enterprise risk management framework.
Prudential Regulation Authority (PRA) and the Financial
Conduct Authority in UK. The third critical challenge is the lack of skilled professionals
who have clear understanding of both the worlds - climate
In May 2021 SEBI mandated top 1,000 listed companies in risk and finance.

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