Excerpts from a discussion on shaping the future of climate change resilience in India:
The program began with Dr. Narendra Mairpady Former Chairman – Indian Overseas Bank, welcoming the participants and explaining the importance of climate risk management for banks. The event was sponsored by Credibl ESG.
Anjalee Tarapore, EVP – ESG, HDFC Bank: The offer document for climate risk is still being prepared. The cost of climate inaction far outweighs the cost of climate action. The climate crisis is often termed as a poly-crisis. Climate risks have no borders. The topmost risk is the risk of disinformation. Climate scientists don’t understand finance and finance professionals don’t understand climate science. Climate change affects vulnerable people the most. India experiences 318 extreme weather days in 2020. Empirical evidence shows that stock markets react positively to good news but do not adequately react negatively to climate disaster news. Energy demands won’t go down and renewable must co-exist with fossil fuels. India’s net zero target is 2070 while most countries have set it at 2050. We need India specific climate models to do our what-if scenarios. Most Indian banks have started their climate risk scenarios. We can’t start with perfect data. Model risk management for climate change models will become very important. We need simplicity in the models and to understand the models. We need pincode level natcat scores for floods, earthquakes, etc. The underlying assessment may be different for different finance players.
Wholesale lending is a bit trickier. Most banks won’t know what kind of assets they will have 30-40-50 years down the road. In the US, SEC stipulates that losses due to severe weather events must be disclosed. This will help reliably assess weather related losses today.
Most countries are recognizing the benefits of energy independence. Nuclear energy is clean but not renewable.
Banks are responsible for their financed emissions. Financial sector must be incentivized on its green footprint. Reputational risk will remain the topmost risk.
HDFC Bank has been looking at TCFD framework as guidance. We have been doing scenario analysis. When we looked at transition risk, we have looked at certain models. Top 1000 companies are disclosing their financed emissions for Scope 1 & Scope 2. However, in the finance sector, scope 3 will be 700 times scope 1 & 2.
Ashwini Kumar, CRO, Union Bank of India: Preparedness of RBI’s new disclosure framework is important. The industry and economy are moving towards decarbonization. Banks cannot be out of sync with the economy. Many of the risks are not visible in the bank’s books. You have to start thinking what to disclose. Today you may have a certain mix of fossil fuel in your portfolio and you will have a target in 3 years. This has to be part of organization strategy and not something for one department to handle. There is a need to do climate shocks to the portfolio.
We will always have shortage of skills, infrastructure, data, etc but we will still have to move forward. We can start with some rough estimate and keep fine tuning those numbers.
Economy may not be able to sustain funding only green projects. Need roadmap for transition for sectors like cement, steel, etc.
Deepak Kumar, DGM – Risk, Union Bank of India: Interconnectedness of disclosure headings is important. In climate risk, a lot of things are forward looking. There has to be improvement in tools and methodologies that the banks are disclosing. Scenario analysis is very useful at customer level analysis.
Jitesh Shetty, CEO, Credibl ESG: How do you make data capture heavily automated? We use AI for that, such as to find out what materials will be used in a project finance. We have a corporate ESG platform and a finance platform.
HSBC Case Study: After the Paris milestone agreement, HSBC started its green journey in 2015. Green bonds happened 9 years ago. Now they are at a stage where they are managing their emissions. They are doing $300 bn of sustainable finance. They have disclosed the loans and also the assumptions. They have disclosed on energy guzzling sectors like petroleum, cement, etc. They have started disclosing not only financed emissions but also facilitated emissions, ie, where they have done underwriting or advisory).
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