“We are the first generation to feel the effect of climate change and the last generation who can do something about it.”-Barack Obama, Former US President.
Friends of the Earth and Oxfam France sued Europe’s largest bank, BNP Paribas, over its massive support of fossil fuels. A summon has been issued because BNP Paribas refuses to stop financing the expansion of fossil fuels, accentuating the climate crisis. The bank will face the court as France’s most polluting bank. The International Energy Agency and the United Nations have stipulated that a bank cannot claim to be committed to net zero while supporting new oil and gas projects. BNP Paribas continues to write new blank cheques to the largest fossil fuel companies without setting any conditions for an oil-free, gas-free ecological transition.
Ignoring fundamental scientific truths, BNP Paribas has become Europe’s largest funder of fossil fuel. The historic lawsuit is part of a global litigation movement that aims to hold the significant climate funders accountable for their legal responsibilities seeking to limit global warming to 1.5 ˚C. The financial industry has a huge responsibility to comply with the Paris Agreement. This maiden climate litigation against a bank will undoubtedly encourage many worldwide.
The recent 13th annual climate chaos report underscores the disparity between public climate commitments made by the world’s largest banks and the reality of their continuous financing of the fossil fuel industry. The 2021 fossil fuel financing numbers remained above 2016 levels at the time of the signing of the Paris Agreement. As many as 60 banks profiled in the report funnelled $185.5 billion in 2021 into the 100 companies in the fossil fuel sector.
The fossil fuel financing remains dominated by four US banks, with JPMorgan Chase, Citi, Wells Fargo and Bank of America over the last six years. Mizuho, MUFG, and five Canadian banks also increased fossil financing from 2020 to 2021. Of the 44 banks committed to net-zero financed emissions by 2050, 28 still need a no-expansion policy for the fossil fuel industry.
To limit global warming to under 1.5 degrees to avert climate chaos, banks must turn off the money tap to fossil fuels and reorient investment plans around their net zero declarations.
India Story
The position of banks in India is no different. All banks are neck-deep into financing fossil fuel in a big way. The public and private sector oil exploration, refineries and fossil players, including Indian Oil, Reliance Petro, Adani Oil, Baharat Petroleum, Essar Oil, Oil India, Graphite India, and Coal India, enjoy enormous funding from banks. Still, they need to comply with the Paris Declaration on ecological safety.
Although the State Bank of India, India’s largest bank, has been wary of the climate risks and is a significant domestic lender to the renewable energy sector, having deployed US$5 billion, a loan book diversification towards renewables may not be a silver bullet to wade off climate risks to its portfolio. SBI plans to tackle Climate Risk through a sustainability responsibility policy encompassing the broader environmental, social and governance risks and opportunities as part of its operations. The policy supports the bank’s risk management framework. Climate risks are also under its ambit. The bank’s credit appraisal mechanism has stood strengthened to mitigate credit risk’s interaction with climate risk. It captures the environmental risks that affect borrower operations.
While the policy moves in the right direction, the bank must realign its lending to manage climate risks. A close look at SBI’s loan book shows that in Q1FY2023, advances to the petroleum and petrochemical sector with US$5.5 billion outstanding as of Q1 2023 grew by 40% year-on-year. The petroleum sector is vulnerable to transition risks from switching to a low-carbon economy. Global investors Blackrock and Storebrand have scrutinised the bank to stop funding coal projects. Investors Amundi and AXA have sold their holdings of the bank’s green bond after concerns regarding its ties to coal projects. Considering the developments, the bank has reviewed its funding for thermal power projects. The bank’s overall power sector exposure, the majority fossil fuel, has fallen over the last couple of years.
What Indian Banks Can Do
The RBI has advised banks to implement the Task Force on Climate-related Financial Disclosures (TCFD) framework, which establishes that regulated entities must assess the potential impact of climate risks and then strategise to manage and mitigate their loan exposure. A formal ESG framework for climate risks helps banks extract sub-par climate disclosures from borrowers. It also emphasises the need for a proper definition of green economic activity, which otherwise acts as a roadblock to implementing a climate risk strategy. Further, the bank should identify science-based metrics and targets to track the climate risks and opportunities before inviting a corporate lending relationship.
SBI considers its environmental, social and governance ESG risks and opportunities as part of its operations. The policy supports the bank’s risk management framework and mitigates the interaction of credit risk with climate risk. However, the journey is long and arduous.
The position of top lenders like PNB, Union Bank, Bank of Baroda, Canara, HDFC, ICICI and Axis Bank is similar. The efforts to make ESG a part of the Rating Rationale for Corporate loans are nascent in banks. The lenders will have to run to perfect their lending art to catch up with the climate risks at their earliest to save their loan portfolios, failing which, the Climate Risk might become their survival risk.
Rightly said, “Climate change is one of humanity’s biggest existential threats. It can manifest in severe physical risks by causing natural disasters, carrying substantial financial and liability risks for the global financial system.”
About the author
Mr Hargovind Sachdev superannuated as a General
Manager of the State Bank of India. Has over 39 years of
experience across State Bank of Travancore, State Bank of
India, State Bank of Patiala, UCO Bank and United Bank of
India.
Headed the Central European Credit Desk of the State
Bank of India in Frankfurt, Germany, from 2006 to 2011,
covering 15 countries and was the CVO of UCO Bank &
United Bank of India till 2016.
Has undergone International Banking Training from the
Asian Institute of Management, Manila, The Phillippines, in
2003 and Multi-currency lending technique training at the
Euromoney Institute, London, in 2009. Has specialisation
in Foreign Exchange, Corporate Credit, Vigilance &
Climate Risk Mitigation in Banks.
He is an accomplished speaker, having conducted
multiple seminars for institutions like ONGC, National
Housing Bank, Hindustan Aeronautics Limited, Bank
of Baroda, Canara Bank, Union Bank of India,
Bandhan Bank, Gita Rattan Management School &
NIIT University.
Mr Hargovind Sachdev is an Independent Director at
HPL Electric & Power Limited & ISF Limited. He is also
a Director at S.K.Singhi & Co (Consultants) Private
Limited, Advisor to SK Singhi & Partners and Director
of Climate Risk & Finance Council, USA.
