Reporting Surge Masks Deeper Issues

The surge in climate disclosures from Indian banks, jumping from 40% in 2022 to 92%, appears to show progress. However, this trend hides a deeper problem: reporting efforts are driven by regulatory compliance rather than strategic integration into core risk management. This leaves banks unprepared for the escalating physical and transition risks India faces.

Market Still Unpriced on Climate Risk

While Federal Bank and RBL Bank are among the few with clear coal phase-out policies, most banks have responded slowly to climate-related financial risks. Federal Bank (trading around ₹280 with a market cap of ₹69,000 crore and a P/E of 17.04) and RBL Bank (priced near ₹325 with a market cap around ₹20,000 crore and a P/E of 24.44) show mixed year-over-year performance. Yet, their stock performance doesn't seem tied to climate risk strategies, suggesting the market hasn't fully priced in climate vulnerability or preparedness. This points to a disconnect between company value and climate resilience.

Regulatory Slowdown and Data Gaps

India's increasing vulnerability to natural disasters, which caused economic losses of $12 billion in 2023 and $170 billion between 1995-2024, highlights the urgency for banks to integrate climate risks. However, regulations are slow to catch up. The Reserve Bank of India (RBI) has a draft disclosure framework, aiming to align with global standards like TCFD. It had proposed voluntary reporting for FY2027 but recently paused mandatory disclosures due to alignment and cost issues, adding to uncertainty. This pause differs from global trends towards climate risk reporting. A key data gap is financed emissions—greenhouse gases from borrowers, which make up most of a bank's climate impact. Only five banks disclosed this for the year ending March 2025. The Securities and Exchange Board of India (SEBI) requires ESG disclosures for listed firms, including value chain emissions, but alignment between SEBI and RBI remains a challenge for thorough risk assessment.

Banks Accumulating Risky Assets

The current approach by most Indian banks risks building up exposure to stranded, non-performing, and socially undesirable assets. Less than half of the 35 banks analyzed have started climate stress testing, and none have shared results, leaving their portfolio performance and asset quality impacts unclear. The limited commitment to phasing out coal lending—only Federal Bank and RBL Bank have clear timelines—is particularly concerning, as reducing exposure to carbon-intensive sectors is key. While banks report more data, it's largely driven by compliance rather than seeing climate risks as fundamental threats to credit quality, collateral, and overall portfolio health. The RBI's own analysis suggests public sector banks might be more vulnerable due to higher exposure to energy-heavy sectors. With India ranking ninth globally in climate vulnerability and facing frequent extreme weather, this inaction poses a major risk to financial stability.

Pressure Mounts for Real Action

While the RBI's work on a climate data repository is noted, the lack of mandatory risk disclosures continues to slow strategic integration. Pressure will likely grow for banks to translate disclosures into actionable risk management, protect asset quality, and bolster financial stability as climate threats increase and global rules change. Banks delaying real action risk not only accumulating unmanageable exposures but also falling behind international peers and facing future regulations unprepared.