[Sugandha Y. is a practising advocate at the Supreme Court of India.
This post is part of the IndiaCorpLaw Blog Symposium on ‘Corporate Law and Climate Change: Indian and Comparative Perspectives’.]
Like any other corporation, banks are exposed to climate risks. These include the risk of increasing loan defaults, stranded assets, and diminishing value of collaterals. Banks in turn contribute to and significantly worsen the impacts of climate change in performing standard banking functions. For instance, lending for critical energy projects expected to have high greenhouse gas emissions. These actions are now facing judicial scrutiny with a few early cases pending in Netherlands, Australia, and France. Other forums and experts considering the issue include the OECD, UN Working Group on the issue of Human Rights and Transnational Corporations and Other Business Enterprises and a select group of UN Special Rapporteurs. Among other reliefs sought in these actions, claimants seek banks to cease financing projects with most significant impacts on the climate, to reduce overall emissions in line with the 1.5°C transition pathway, and to disclose internal investment documents to assess their alignment with the Paris Agreement.
After pursuing major emitters for climate accountability, the latest wave of climate litigation seeks to move further up the chain of actors. This goes beyond promoting financial flows to support sustainable energy transition, low carbon development, or financial support for adaptation challenges from the changing climate. The latest route to corporate accountability targets emissions that are ‘financed’ through loans and investments or ‘facilitated’ through capital markets activities by banks. Claimants aim to ‘turn the tap off’ on finance that brings most greenhouse gas emitting projects to life.
This blog post underscores the importance of climate disclosures by banks. It discusses existing climate-related disclosures practices by Indian banks, and highlights the financial and legal implications of such disclosures. While necessary regulatory guidance is still awaited in India, this blog post argues that climate disclosures by banks in the country are inadequate to manage the growing climate risk to banks or to address the impact of banking functions on the climate.
Banks and Climate Disclosures
Central banks around the world have introduced supervisory expectations for banks in their jurisdictions to address the growing physical and transition risks of climate change to the economy. These supervisory requirements range from climate stress testing, climate risk disclosure, and management by the Bank of England and the European Central Bank; to credit flow management for decarbonization by the People’s Bank of China. What is expected from the supervised banks to meet the regulatory expectation varies across jurisdictions for reasons including the scope of the statutory mandates of the concerned central banks. Central banks traditionally are conservative institutions, concerned with maintaining price stability and in doing so to demonstrate market neutrality. Illustratively, among key regulators in this area, the mandate of United States Federal Reserve is far more restrictive when compared to the Bank of England, the European Central Bank, or the People’s Bank of China.
Under the Reserve Bank of India Act 1934, the Reserve Bank of India (RBI) is mandated to operate a monetary policy framework aimed at maintaining price stability and pursuing growth. RBI acknowledged in its annual report of 2019-20 the need for standardised disclosures as a key priority to address climate risk to the domestic financial sector. Annual reports and other periodic research published by RBI, as in the case of most central banks, are important triggers for future prudential regulation. RBI subsequently issued directions aimed at increasing access to finance for green energy. These include directions to regulated entities for green deposits and directions setting out loan targets for renewable energy sector. Requirements for banks (and other regulated entities) to consider financial risks from climate change paused at a draft framework issued by RBI in 2024.
Climate-relevant Disclosures by Banks in India
Select listed banks are also subject to Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015. The Regulations require related disclosures under the Business Responsibility and Sustainability Report (‘BRSR’), to be submitted by the top 1000 listed entities based on market capitalisation under regulation 34(2)(f). The Regulations make it mandatory to disclose Scope 1 and 2 greenhouse gas emissions. Disclosure of Scope 3 emissions is voluntary. A further sub-set of disclosures, BRSR Core (including Scope 1 and 2 emissions), requires reasonable assurance, disclosure for value chain (75% purchases/sales by value) for top 1000 entities listed by market capitalisation.
Mandatory information sought in BRSR is related to the operations/activities of the reporting entity alone. Consequently, disclosures for actors in sectors such as the financial industry show an incomplete picture of true climate impact. For instance, attributes relevant for the present purposes are Scope 1 and 2 emissions, and energy consumption. BRSR reports of top ten reporting banks for financial years 2024-25 and 2025-26 show that disclosures are limited to emissions from: bank owned vehicles, generators, fire suppression equipment (Scope 1), purchased electricity in operational locations and data centres (Scope 2). Since Scope 3 emissions are to be disclosed on a voluntary basis, expectedly, disclosures on this parameter are either not made, are limited, or are not standardised, limiting comparability. Where disclosed, the information is limited to categories like: business travel, business stay, and paper used. Such disclosures evidently mask the true scope of emissions by banks in financing high emitting projects. Some banks specifically refer to financed emissions. Some also make a reference to the industry standard Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting and Reporting Standard. Most banks do not report financed emissions for their entire portfolio nor do they use the PCAF Standards. The small sub-set of banks that do, only make disclosures for a certain critical sector, for a sub-set of selected entities, or for a percentage of net-advances and investment portfolios. Disclosures made on climate risk in particular are vague, if not completely absent.
Research by MSCI and Carbon Disclosure Project on select financial companies found that Scope 3 emissions constitute 92% of emissions of financial institutions, including banks. Financed emissions were found to be 700 timesthat of Scope 1 and Scope 2 emissions. Most banks do not assess the critical physical risk of climate change. According to PCAF, 15 Indian banks committed to disclose the carbon footprint of their investments and loans; however, only two banks appear to have disclosed these so far. No comments are made on the adequacy of the disclosure by PCAF in terms of the PCAF reporting standard. An evaluation of critical physical risk of climate change should at least consider most apparent issues such as the likelihood of borrowers’ default on loan repayments, risk of early stranding of assets, and asset price devaluation, in the event of extreme climate events.
RBI’s Draft Climate Disclosure Framework would bring many more entities into the reporting boundary than the current short list of banks in the BRSR reporting framework. The in-scope entities would include all Scheduled Commercial Banks, Tier-IV Primary (Urban) Co-operative Banks (UCBs), All-India Financial Institutions (viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI), and Top and Upper Layer Non-Banking Financial Companies (NBFCs). If and when the framework is operationalised, the issues of vague data may survive. The Draft Framework does make the globally recognised standard of reporting in the financial industry i.e. Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting and Reporting Standard, mandatory. As a baseline, the definition of financed emissions in the interest of standardisation and comparability should refer to the PCAF standard, define the reporting entity’s boundary of assessment to avoid the entity choosing which parts of their portfolio to consider for risk assessment, and potentially prescribe standardised methodology for calculation of emissions.
A key hurdle for in-scope entities in the BRSR framework is that banks lend to entities beyond the SEBI mandated 1000 entities. Most entities that banks lend to would not report Scope 1 and Scope 2 emissions. Financed emissions are calculated as a proportion of the Scope 1 and Scope 2 emissions of, say, the company that a bank has extended a corporate loan to. When the underlying information is missing banks will not be able to make the disclosures necessary to manage climate risk.
Financial and Legal Implications of Weak Disclosures
Recent research found that public sector banks accounted for around 75% of the loans while private banks contributed nearly 83% of the total underwriting for coal finance in India. Investors reportedly lost USD 3 billion between 2016 and 2020 as coal sector stocks underperformed. These losses and several others are not fully priced as a result of poor disclosure. This in turn hinders preparation, disclosure, and alignment with well-evidenced transition plans in banks.
The latest round of cases against banks is based on the knowledge of the concerned board of directors of dangerous impacts of climate change on the portfolio of the banks, and impacts of the bank’s investment on climate change. Some of the cases rely on breach of duty of care and domestic statutes on due diligence obligations of corporations to account for human rights and environmental harm. The actions in court are in one part a response to the limited nature of or in some cases the absence of climate risk related regulation of banks. This includes inadequate disclosures by banks and inadequate disclosure expectations from them by regulators.
Thus, delay in enacting adequate regulation and ensuring effective oversight by bank boards in India leaves banks and investors ill-equipped. It remains to be seen whether this regulatory vacuum filled in the interim by inadequate reporting will create the conditions for litigation risk for banks in India. Actions initiated in other jurisdictions and how courts address them will most certainly be relevant for potential climate litigation domestically.
– Sugandha Y.
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