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By Oxfam India
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The Importance of Environmental, Social and Governance Risks on Bank Assessments

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The Importance of Environmental, Social and Governance Risks on Bank Assessments
The Importance of Environmental, Social and Governance Risks on Bank Assessments

- Shreya Kaushik

Impact of climate change and rising inequalities is becoming a major concern globally but particularly so for India. India faces a financial deficit of about US$ 8.5 trillion (INR 533 lakh crore) if it is to achieve the SDGs by 2030, translating to an annual shortfall of US$ 565 billion (INR 35.5 lakh crore) from 2016 until 2030.

Accounting for over two-thirds of financing, the banking system has been the largest financier of an ever-growing global economy. Given this, banks are increasingly realising the necessity to change their strategy and business model to integrate environment, social and governance (ESG) considerations.

Fair Finance India assessed eight largest Indian banks on parameters of ESG indicate a broader shift in the management focus to move towards sustainable investments but there is a long way to go. All the eight banks have scored high on the parameters of financial inclusion, and policies against corruption. However, on the parameters of environment, nature and social categories (especially human rights, labour rights and arms) almost all banks have a poor score.

On financial inclusion, all eight banks have policies, services or products that specifically target poor and marginalized groups, though there is variance in the level of detail provided regarding particular services available.

Under the environment category, almost all the assessed banks scored zero in the themes of nature and climate. While there appears to be a lot of interest in the area of environment among financial institutions in general, the banking sector is yet to align its business strategies with the opportunities that are available.

All parameters under the social category almost all banks scored very low. Parameters of human rights, labour rights and arms scored low in the assessment. With India committed to strengthening its commitment towards social issues and human rights through National Guidelines on Responsible Business Conduct (NGRBC) and National Action Plan (NAP) on Business and Human Rights, the banking sector has much ground to cover. These policy changes provide an opportunity for the banking sector to prepare and respond with appropriate strategies and commitments.

ESG risks affect a bank's asset quality, capital strength, profitability, liquidity and funding. For example, climate change may undermine the repayment capacity of borrowers in environmentally sensitive areas or conflict-prone sectors (such as extractives), reducing both asset quality and profitability. A good illustration of this is the beginning of the work for 5 thermal power plants in Srikakulam district in Andhra Pradesh in 2016. The fishing communities in the district raised objections to the implementation of five thermal power plants on the grounds that they will disrupt the marine ecology by increasing the sea temperature and destroy local fisheries. Of the selected projects, four were stalled following such protests in Srikakulum district (Bhadreshwar TPP, Sompeta TPP, Kakarapalli TPP, and Srikakulam TPP). It is reported that the state government had taken up to RS 600 crore loan for land acquisition only.

In fact as Mohan Tanksale, former Indian Banks’ Association Chief said at the recently held Inclusive India Summit 2019, “grassroots level integration of ESG in the banking industry” is required. Sustainable finance is at a crucial stage where its effective implementation depends upon an enabling policy environment and ability of the financial sector to be forward-looking. This can form the basis of achieving the sustainable development goals and fuel economic growth.