Indian Institute of Banking & Finance

ISO 21001:2018 Certified

CLIMATE FINANCE
for
BANKS/FIs
 Triple Planetary
Crisis
Heat wave across India Draught in Eastern Nepal

Cyclone Dana in Bengal Flood in Chennai

 Global Developments in Climate
Regulations
2023
COP 28
UAE
2014 2014 2021
1972 1990 Conclusion of the
5th IPCC 5th IPCC COP 26
UN Meeting UNFCC first Global Stock
Report Report 2015 Glasgo
on C COP 27 Take (GST);
1992 Paris w
Environment
1988 Formed 2007 2012 2021-22 Egypt
Earth Agreeme IPCC 1.5
IPCC 4 IPCC
th
Rio+20 6th IPCC Operationalisatio
Summit nt at Net
Formed Report Summit Degrees Assessment n of Loss and
- Rio COP21 Zero
Report Cycle Damage Fund
Banking
UN SDGs Alliance

2008 2008 2014 2018 2022

World Natural Green Bond Creation of 2023
Basel
1987 1997 Bank Capital Principles NGFS International
2015 Committee 2022
Brundtland Kyoto issues Financial (ICMA) Sustainability
Task Force Principles for Independent
Commissio Protocol first Alliance 2019 Standards
2010 on Climate- Climate Risk
n Report 2003 Green Green formed Portfolio Net Zero Board (ISSB)
related Management High-Level
4th Bond Climate Decarboniz Financial Asset Owner Expert issued its first
IPCC Fund set Sustainable ation Disclosures Alliance Group on two IFRS®
Report up Banking Coalition (TCFD) Principles for Climate Sustainability
and (PDC) Responsible Finance Disclosure
Finance formed Banking Report Standards,
Network
(SBFN) COP 27 Loss
formed & Damage
Fund
Where do
Banks fit
in?
 Financing
destruction?

Adverse Impact on
Biodiversity loss Stranded assets Social impact
environment
 Climate Risk to Financial Risk
Financial Risks Economic Transmission Channel

Credit Risk Micro - Affecting individual businesses and households

• Defaults by businesses
and households Businesses Households
• Collateral depreciation • Property damage and • Loss of income (from weather
business disruption from disruption health impacts, labour
Market Risk severe weather market frictions)
• Repricing equities, fixed • Stranded and new • Property damage (from severe
income, commodities etc. expenditure transition weather) or restrictions (from low-
• Changing costs carbon policies) increasing costs and
• Legal liability failure to adapt) affecting valuations
Underwriting Risk
Climate • Increased insured losses
Change • Increased insurance gap
Macro: Aggregate impacts on the economy
Risk
• Capital depreciation and increased investment
Operational risk • Shifts in prices (from structural changes, supply shocks)
• Supply chain disruption • Productivity changes (from severe heat, diversion of investment to
• Forced facility closure mitigation and adaptation, higher risk aversion)
• Labour market frictions (from physical and transition risks)
Liquidity Risk • Socioeconomic changes (from changing consumption patterns,
• Increased demand for migration, conflict)
liquidity • Other impacts on international trade, government revenues, fiscal space,
• Refinancing risk output, interest rates and exchange rates.

Source: Centre for Energy Finance

Financed Emission Report- Banks
from G7
 Task Force on Climate-related Financial Disclosures
(TCFD), 2015

To help identify the information needed by investors,

lenders, and insurance underwriters to appropriately Governance
assess the financial impacts of climate-related risks and
opportunities.
Strategy

Report climate-related
Additional guidance
Risk
financial disclosures in Climate-related
the annual financial
for Financial & Transition/physical risks
Management
high risk sectors & opportunities
filings

Metrics
and Targets
Scenario analysis & Short-term, Qualitative &
forward-looking medium-term quantitative
information & long-term disclosures
International Sustainability Standards Board
(ISSB), 2021
The ISSB Standards are designed to ensure that
companies provide sustainability-related
information alongside financial statements—in the
same reporting package.

The ISSB has set out four key objectives:

 To develop standards for a global baseline of
sustainability disclosures;
 To meet the information needs of investors;
 To enable companies to provide comprehensive
sustainability information to global capital
markets;
 To facilitate interoperability with disclosures that
are jurisdiction-specific and/or aimed at broader
stakeholder groups.
IFRS S1 provides a set of disclosure requirements
about the sustainability-related risks and
opportunities they face over the short, medium and
long term.
IFRS S2 sets out specific climate-related disclosures
and is designed to be used with IFRS S1.
 What is
happening
in India?
 Focus on Climate
Finance

Shri. Narendra Modi Mr. António Guterres Shri. Shaktikanta Das

Prime Minister of India Secretary General of the United Nations Governor, Reserve Bank of India
“….People are starting to feel the effects “…South Asia is one of the most vulnerable
“…It is imperative that we regions to climate change because of its large
of climate change around them. In the
recognize explicitly the population and degradation of natural
last few decades, we have seen its side
importance of the private sector resources…”
effects, faced unforeseen calamities….”
in implementation efforts and
“….For humanity to combat Climate better align incentives in the “….climate-related risks would be a focus
Change, concrete action is needed. We financial sector with the 2030 area in times to come and that the central
need such action at a high speed, on a Agenda…” bank would want to focus on it in a
large scale, and with a global scope…” collaborative manner….”
Status of Climate Finance in
India
 Status of Climate Debt Market in
India

A. Global
Markets

B. Indian
Markets
 Developments for Banks in
India
2017
2016 2021 2023
Issued
2010 CompensatoryDisclosure SEBI Business Issuance
2003 Clean Responsibility of
Electrici AfforestationRequiremen
Energy Cess Fund Act and Sovereign 2024
ty Act ts for
Rules Sustainability 2022 Green Draft
Issuance
Reporting SEBI Bonds guidelines on
2012 and Listing 2020 2022 Expert
(BRSR) Consultation 'Disclosure
Perform, of Green National Guidelines Energy committee framework on
2006 Paper on
Achieve & Debt mission for Conservatio on Transition climate-
Tariff Green and
Trade (PAT) Securities, Electric n Finance by
Policy Blue Bonds related
Scheme SEBI Mobility Plan (Amendmen IFSCA
(further financial
t) Act 2022 risks, RBI
updated in
2023)
2023
2021 2022 Framework for
2014 2016 2022 Green
2008 RBI joins acceptance of
National India signed RBI Discussion Hydrogen/ Green Deposits
National Paris NGFS
Auto Fuel 2019 Paper on Green Ammonia
Action Plan Agreement
Policy & Auto Farmer Energy Climate Risk Policy
on Climate Sustainable Statement on
Fuel Vison & Security and and Sustainable
Change Finance Development
Policy 2025 2015 Upliftment Finance Sovereign
2005 2010 Task Force al and
India Campaign (PM- Green
Disaster Energy set up Regulatory
submitted Kusum Scheme) 2020 India’s Updated Bonds Framewo
Management Conservation in 2021 Policies
its Intended Apex Committee NDC rk of India
Act Act NDC to for approved
UNFCCC Implementation India announces (November
of Paris achieving net- 2022)
Agreement zero emissions
created by 2070 at COP India assumes
27 the G20
How can banks decarbonise the lending portfolio?
Vision of Decarbonization Plan

Support
Being
alignment with Supporting the
Transparent and
India’s NDC customers
goals accountable

What does a Bank need to support the vision

Supporting alignment with Being transparent and

Supporting the customer
India’s NDCs accountable
► Identification of critical sectors/ sub ► Scale and innovate sustainable ► Disclose Decarbonization strategy to
sectors which will have maximum finance products to support unique stakeholders and customers
impact on Bank’s emissions profile customer needs ► Disclose the global framework
► O&G, Thermal Coal. Power & ► Empower the relationship managers (SBTi. NZBA) to which the bank’s
Utilities, Transport where with understanding of the products decarbonization plans are aligned
global banks have been focussing to facilitate customer engagement ► Align with India’s NZ goals
attention ► Roll out a client transition ► Set interim and final targets
► Agriculture from India specific framework to understand if the
standpoint customer’s NZ goals are in alignment ► Have quantifiable metrics to track the
to yours progress against the targets
► Have specific targets identified for
these sectors and disclose progress ► Report annual progress made
► Accelerate investments into clean
technology
Business Responsibility & Sustainable Reporting
(BRSR)

BRSR integrates several reporting Principle 1 Principle 2 Principle 3

standards and frameworks to develop a Integrity and Ethics Sustainable Products Employee Wellbeing
standalone comprehensive ESG • Training and awareness • Sustainable sourcing • Insurance/retirement
disclosure framework • Conflict of interest • Reuse, recycle & benefits
involving directors / disposal • Equal opportunity policy
KMPs • Life cycle assessment • Grievances redressal
The framework has three reporting • Disciplinary action taken • Investment in ESG • Health & safety
sections: • Penalty / Punishment technologies • Incident reporting
A. General Disclosures
B. Management and processes Principle 4 Principle 5 Principle 6
C. Principle wise performance Stakeholder Interest Human Rights Environment
• Consultation between • Training of human rights • Energy consumption
stakeholders & board • Wages & renumeration • Water withdrawn &
• Identification of • Assessment on human discharged
stakeholders & rights • Air and GHG emissions
marginalised / • Complaints and • Water generation &
vulnerable groups redressal mechanism disposal
• Frequency of • Business continuity plan
engagement
Principle 7 Principle 8 Principle 9
Regulatory Policy Inclusive Growth Consumers and IT
• Affiliation with trade & • Preferential • Cyber security
industry chambers / procurement policy • Data privacy
associations • CSR projects • Data breaches
• Details of anti- • Benefits from • Consumer complaints
competitive conduct intellectual property • Consumer education and
• Publicly policy • Social impact awareness
advocated assessment
Environment Social Governance
Focus on Reasonable Assurance through BRSR Core
BRSR Core framework highlights the set of 9 critical
ESG attributes and KPIs that need to be reasonably
Reasonable Assurance for listed entities
assured
FY 2026- Attribute Description
FY 2022-23 FY 2023-24
27 Change in GHG Scope 1 & 2 emissions &
footprint intensity
BRSR Reasonable Reasonable
Change in water Water Consumption &
• Mandatory Assurance Assurance on footprint intensity
reporting for top on BRSR BRSR Core
1000 companies Investment in Amount of R&D invested in
Core technologies
Assurance • reducing
• Mandatory Mandatory for
• No mandatory environmental
for top 150 top 1000
requirement impact
companies companies
Embracing Break-up of waste
circularity management in 8 categories
Amount spent (% of revenue) on
ESG Disclosures for value chain Employee Well- employee wellbeing initiatives
Considering the ESG footprint of value chain partners of listed being & safety (incl. details on safety-related
companies, SEBI proposed ESG disclosures and assurance for the value incidents)
chain of listed companies with certain thresholds that will be specified. % of wages paid to women and
Proposed roadmap is as under: Gender Diversity
complaints on POSH
FY 2024- FY 2025- % of materials sourced from
25 26 Inclusive MSMEs, small producers and
Development job creation opportunities in
• ESG Disclosure as per BRSR • ESG Disclosure as per BRSR small towns
Core for value chain for top 250 Core for value chain for top
companies (by market cap) on a 250 companies Fair engagement No. of days of accounts payable
“comply-or-explain” basis with customers & and % of negative media
• Assurance not mandatory • Assurance on “comply-or-explain suppliers sentiment
basis Source: SEBI Consultation paper on “Balanced
Conducting Framework
business for
with
ESG disclosures, Ratings and investing” dated April 2023
Draft Framework of climate-related disclosures (February,
2024)
Thematic Pillars of Disclosure
Governance Strategy Risk Management Metrics & Targets
Baseline 1.Governance structure 1. Focus on most 1. Identification, 1. Mitigation & adaptation
Disclosures for climate-related risks material climate issues assessment & targets in alignment with India's
2. Roles & 2. Timeline for prioritization of climate NDCs
responsibilities of Board planning & decision- risk 2. Validation of monitoring
and Sr. Mgt. making 2. Impact on credit risk framework for climate targets
3. Management 3. Current & systems & profiles 3. Analysis of performance
competency & upskilling anticipated impact of 3. Impact on traditional against targets
climate risk on risk areas
business model 4. Integration across 3
lines of defence &
monitoring

Enhanced 1. Integration of climate 1. Impact on strategy, 1. Parameters to identify, 1. Absolute gross scope 1, 2 & 3
Disclosures in business strategy business model & prioritise & monitor emission based on GHG
2. Target & minitring operations climate risks protocol
metrics 2. Transition plan, 2. Integration in overall 2. Financed emission across
3. Sr. Mgt. control & resourcing and L&D risk management process industry & asset class
oversight processes plans 3. Scenario analysis & 3. Details of emission
3. Incorporation into stress testing computation methods
ICAAP - scenario 4. Management use of 4. Quantification of physical &
analysis stess testing result transition risk on portfolio
exposure
5. Capital deployment towards
capital risk mitigation &
et Zero for Indian Banks
98% of the GHG emissions produced by a Bank comes from the Financed
Emissions

Overall GHG Emissions for Banks

Financed Emissions (Scope

Operational Emissions
3)

Scope 1 Scope 2 Scope 3 • Emissions linked to the

investments and lending
• Business activities of a bank. These
• DG Sets are emissions produced by
Electricity Travel
• Fire • Employee lending to Corporates,
consumed
MSMEs, Home Loans, Auto
Extinguishers across Commute
• Refrigerants • Branches • Leased Loans and other customer
• Company’s • ATMs segment
Facilities
owned • Data Centres • Purchased
vehicles • Head Office Goods and
Service
Overview of PCAF

Paris Alignment Value Chain for Financial

Institutions
Overview of GHG Accounting Standards for Financial
sector

Financed Financed Emissions

Emissions Provides a methodological
guidance to measure and
A disclose GHG emissions
associated with seven financial
asset classes, and guidance on
emission removals.

B Facilitated Emissions
Facilitated Provides a methodological
guidance for measuring and
Emissions reporting GHG emissions
associated with capital market
issuances.

Insurance-associated
C Emissions
Insurance- Provides a methodological
associated guidance for measuring and
Emissions reporting GHG emissions
associated to re/insurance
underwriting.
Measurement of Financed Emissions
Seven Asset
Classes
GHG Accounting and Types of Emissions
GHG Accounting refers to the processes required to consistently measure the amount of GHGs generated,
avoided or removed by an entity, allowing it to track and report these emissions over time.

GHG Protocol Corporate Value Chain standards categorizes Scope 3 emissions into 15 categories. The emissions
from loans & investments of a Bank/FI fall under Scope 3, category 15 (downstream emissions).
Asset-class based Approach
Financed Emission Metrics

Generalized method of calculating financed emissions

Example : Calculation of financed emission in Business
Loans

EVIC= Sum of market cap of ordinary shares + Market cap of

preferred shares + Book value of total debt & interest
Example : Calculation of financed emission in Project
Finance
PCAF to SBTi
Illustrative Example : Calculation of weighted data quality score of a Bank’s
loan book

Annual Report 2023-24

Sustainability Report- State Bank of
India
Physical Risk Impact and Resources
Climate-Related Potential Financial Impacts
Physical Risks

Acute
• Increased severity of • Reduced revenue from decreased production National Disaster
extreme weather capacity (e.g., transport difficultés, supply chain Management Authority
events such as interruptions)
cyclones and floods • Reduced revenue and higher costs from negative Indian Meteorological
impacts on workforce (e.g., health, safety, Department, Min. of
absenteeism) Earth Sciences
• Write-offs and early retirement of existing assets
(e.g., damage to property and assets in “high- Ministry of Environment,
risk” locations) Forest & Climate Change
Chronic
Council on Energy,
• Changes in • Increased operating costs (e.g., inadequate Environment & Water
precipitation patterns water supply for hydroelectric plants or to cool
and extreme nuclear and fossil fuel plants)
variability in weather • Increased capital costs (e.g., damage to
patterns facilities)
• Rising mean • Reduced revenues from lower sales/output
temperatures • Increased insurance premiums and potential for
• Rising sea levels reduced availability of insurance on assets in
“high-risk” locations
Physical Risk Mapping- Maharashtra

Source: Report by Ministry of Environment, Forest & Climate

Change, 2023
Impact of Transition Risk
Climate-Related Transition Potential Financial Impacts
Risks
Policy and Legal
• Increased pricing of GHG Emissions • Increased operating costs (e.g., higher compliance costs,
• Enhanced emissions-reporting increased insurance premiums)
Obligations • Write-offs, asset impairment, and early retirement of
• Mandates on and regulation of existing assets
existing products and services • Increased costs and/or reduced demand for products and
• Exposure to litigation services resulting from fines and judgments
Technology
• Substitution of existing products and • Write-offs and early retirement of existing assets
services with lower emissions • Reduced demand for products and services
options • R&D expenditures in new and alternative technologies
• Unsuccessful investment in new • Capital investments in technology development
• technologies • Costs to adopt/deploy new practices and processes
• Costs to transition to lower
emissions technology
Market
• Changing customer behaviour • Reduced revenue from decreased demand for
• Uncertainty in market signals goods/services
• Increased cost of raw materials • Reduced revenue from decreased production capacity
(e.g., delayed planning approvals, supply chain
interruptions)
• Reduced revenue from negative impacts on workforce
management and planning (e.g., employee attraction and
Sectors most exposed to transition risks in India

India’s Top 20 Emission Industries (Millions of Metric tons of

CO2)
6
Warehousing and support activities for transportation 7
7
Pharmaceuticals, medicinal chemical and botanical
8
products
10
Real estate activities 10
13
Construction 14
23
Air transport 23
25
Administrative and support services 32
45
Coke and refined petroleum products 60
68
Land transport and transport via pipelines 77
79
Other non-metallic mineral products 85
492
Electricity, gas, steam and air conditioning supply 1,011
- 0 0 0 0 0 0
20 40 60 80 00 20
1, 1,
Source: IMF
Transition Risk into Credit Assessment

EL= EAD*PD*LGD
Source: Moody’s Transition Risk Methodology
Assessing Probability of Default
Black-Scholes Merton Model

EL= EAD*PD*LGD

Source: Moody’s Transition Risk Methodology

 India

D
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Banks in

is a
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A a
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Key Challenges in Climate Risk Assessment

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S c en cy
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CDP: Financed Emission Report for Banks
in India
Carbon Markets for Climate Financing
Carbon Markets

 Carbon markets aim to reduce greenhouse gas

emissions enabling the trading of emission
units (carbon credits), which are certificates
representing emission reductions.

 Trading enables entities that can reduce

emissions at a lower cost to be paid to do so
by higher-cost emitters.

 By putting a price on carbon emissions,

carbon market mechanisms raise awareness of
the environmental and social costs of carbon
pollution, encouraging investors and
consumers to choose lower-carbon paths.

 There are two main categories of carbon

markets: cap-and-trade and voluntary.

 Cap-and-trade markets sets a mandatory limit

(cap) on GHG emissions and organizations
that exceed these limits can purchase excess
allowances to fill the gap or pay a fine.

 Voluntary markets enable the trading of

carbon credits outside of the regulatory
Carbon Markets - Landscape
Voluntary Carbon Markets (VCM) Compliance Markets – Emission
 The Voluntary Carbon Market (VCM) enables
Trading System (ETS)
organizations or individuals to purchase carbon  Unlike the VCM which is regulated by market-
credits that have been issued by private, third- based mechanisms, compliance markets are
party offset credit schemes in order to voluntarily established and overseen by governments or
offset their own carbon footprints. supranational organizations to meet their
 Companies can purchase two different types of emissions reduction targets.
offset credits – removal, and avoidance credits –  While varying in scope, cap-and-trade systems ‘cap’
usually equivalent to 1 tonne of CO2 . the total amount of GHG emissions that may be
 VCM is critical in driving investment in mitigation released within a particular jurisdiction, allocate or
auction off emissions allowances (or carbon
action and presents a unique opportunity for
credits) to regulated entities, and then enable
developing markets with otherwise limited access
these entities to trade their respective credits
to foreign direct investment.
amongst themselves.
 It requires polluters to pay for their emission.
 The EU ETS was, until the 2021 launch of China’s
cap-and-trade scheme, the largest carbon market
with over 12,000 emission entities and 27 Member
Challenge
States of the EU covered.
s
Lack of Political
Integrity issues
uniformity uncertainty
Lack of Limited institutional
capacity
Price volatility
infrastructure
Carbon Border Adjustment Mechanism
(CBAM)
The proposal for the transitional implementation of a Carbon Border Adjustment Mechanism (CBAM) under the European Union’s
(EU) “Fit for 55” policy came into effect on the first of October 2023 with its taxation phase starting from January 2026.
Carbon Border Adjustment Mechanism
(CBAM)

Is there an impact on India’s exports?

Definitely. India and the EU have been significant trade partners with India exporting around 26% of its CBAM products to the EU when
compared to the world.
With a growing number of economies such as the US and Japan showing interest in formulating policies like that of the EU, India needs
to develop its own carbon credit trading scheme to challenge taxes levied by the EU and collect proceeds itself to fund the country’s
climate targets.
Carbon Markets in India
Perform, Achieve and Trade (PAT)
Scheme
Aimed at energy efficiency and cost-effectiveness, PAT was introduced in 2008 under the National Mission for
Enhanced Energy Efficiency (NMEEE), as a regulatory instrument to reduce Specific Energy Consumption (SEC) in 13
energy-intensive sectors, with an associated market-based mechanism by creating certificates for excess energy
saving which can be traded subsequently.
Carbon Markets in India
Carbon Credit Trading Platforms- Indian
Energy Exchange (IEX)

 The Renewable Energy Certificates

(REC), a market-based instrument, was
introduced to promote Renewable
Energy (RE) and facilitate compliance
with Renewable purchase obligations
(RPO) under PAT scheme.

 For the exchange of the RECs a carbon

credit trading platform was formed in
India named as the Indian Energy
Exchange (IEX). IEX serves as the
leading energy market in India, offering
a countrywide automated trading
system for the physical supply of
electricity, Renewable Energy (RE), and
RE certificates.

 The total Renewable Energy Certificates

(RECs) traded were 59,65,430,
equivalent to 5.9 Billion Units (BUs) of
electricity for the financial year 2023.
The ESCerts market at the exchange
accomplished a cumulative trade of
1,76,479 ESCerts which is equivalent to
176 Million Units (MUs) during the
 Pritam Kar
Deputy Director (Academics)
Indian Institute of Banking &
Finance, Mumbai
dd.aca2@iibf.org.in
+91 9674795515