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The imperative of GHG accounting and financed emissions for future-proofing financial institutions in India

The financial sector is undergoing a seismic shift as environmental, social, and governance (ESG) considerations rise to the forefront. This is particularly true in India, a nation increasingly aware of the looming threat of climate change. Escalating climate risks, such as extreme weather events and rising sea levels, disrupt business operations, damage infrastructure, and threaten coastal properties held as collateral by FIs, potentially leading to loan defaults and financial instability.

Heightened investor scrutiny prioritizes sustainable investments, demanding transparency on ESG factors, and a lack of robust GHG accounting practices could make Indian FIs less attractive to environmentally conscious investors. Additionally, the evolving regulatory landscape for ESG disclosure, both globally and domestically, requires compliance to prevent scrutiny and reputational damage. Thus, understanding and managing GHG emissions is crucial for Indian FIs to future-proof their businesses amidst these growing challenges.

Adequate implementation of GHG accounting and financed emissions propose the following benefits to the financial sector:

  • Climate risk mitigation: By measuring emissions, FIs establish a baseline for assessing climate-related risks. This allows them to develop proactive strategies to address these risks, such as diversifying portfolios away from high-emitting sectors and investing in climate adaptation solutions
  • Enhanced decision-making: Understanding the emissions profile of potential investments enables FIs to make informed decisions that align with their sustainability goals and support the transition to a low-carbon economy. This can lead to the identification of new opportunities in renewable energy, green infrastructure, and sustainable technologies
  • Capital attraction and retention: Sustainable investments are projected to reach over US $40 trillion globally by 2030. FIs with robust GHG accounting demonstrate a commitment to environmental responsibility, attracting environmentally conscious investors and fostering trust with stakeholders
  • Improved financial resilience: Proactive management of climate risk allows FIs to avoid potential financial losses associated with stranded assets (e.g., fossil fuel reserves becoming obsolete) and increased borrowing costs due to a higher perceived climate risk profile

Although these provide multiple benefits to FIs, challenges exist in the implementation of GHG accounting:

  • Data collection and management: Building a robust data infrastructure is essential for gathering accurate emissions data from both internal operations (energy consumption, business travel) and financed activities (emissions generated by companies FIs invest in or lend to). This can be a complex and resource-intensive undertaking
  • Standardization: The lack of globally standardized methodologies for GHG accounting and financed emissions can create challenges for comparability between FIs. This makes it difficult for investors and other stakeholders to accurately assess the climate impact of different institutions
  • Client engagement: Encouraging clients to participate in decarbonization efforts and develop transition plans requires ongoing collaboration and education. FIs may need to provide clients with resources and support to help them navigate the transition to a low-carbon economy
  • Internal capacity building: Training staff on GHG accounting principles and integrating climate considerations into risk management practices necessitates investment in training programs and hiring personnel with the necessary expertise

Although these challenges exist, the criticality of GHG accounting and financial emissions cannot be ignored, given the mounting climate and regulatory concerns. By embracing GHG accounting and financed emissions, Indian FIs have the potential to become:

  • Responsible financial stewards: FIs can play a critical role in supporting India’s transition to a low-carbon economy by directing capital towards sustainable sectors and encouraging responsible business practices among their clients. This leadership can contribute to achieving the goals set forth in the Paris Agreement and mitigating the worst impacts of climate change
  • Leaders in sustainable finance: FIs that demonstrate a strong commitment to ESG principles can position themselves at the forefront of the burgeoning sustainable finance landscape. This leadership can unlock new opportunities for innovation and investment in areas like green infrastructure, clean energy solutions, and climate-resilient technologies
  • Enhanced brand reputation: Demonstrating a commitment to environmental responsibility fosters trust with stakeholders, strengthens brand image, and attracts a new generation of environmentally conscious customers and investors. This can lead to a competitive advantage in the marketplace

Multiple strategies have emerged aimed at tackling the above-mentioned challenges:

  • Develop a robust GHG accounting methodology: Utilize recognized standards like the GHG Protocol or PCAF Standard to ensure transparency and comparability of emissions data
  • Invest in data collection and management systems: Implement robust data infrastructure to gather accurate emissions data from both internal operations and financed activities. Consider leveraging technology solutions like cloud computing and data analytics platforms to streamline data collection and analysis
  • Set ambitious emissions reduction targets: Align your emissions reduction targets with the Paris Agreement goals and consider science-based targets offered by the Science Based Targets initiative (SBTi). This demonstrates a clear commitment to climate action and fosters long-term sustainability
  • Engage with clients on climate transition: Collaborate with clients to develop transition plans and support their decarbonization efforts. Offer financial products and services that incentivize sustainable practices, such as green loans or bonds, and provide educational resources to help clients understand the benefits of transitioning to a low-carbon economy
  • Disclose emissions transparently: Regularly report on your GHG emissions and financed emissions in accordance with relevant frameworks like the TCFD recommendations, subsumed under the ISSB standards or GRI Standards. Transparency builds trust with stakeholders and allows investors to assess your climate performance
  • Build internal capacity: Train staff on GHG accounting principles and integrate climate considerations into your risk management practices. Consider partnering with external experts to bolster your internal capabilities in this area

Several FIs globally are demonstrating best practices in GHG accounting and financed emissions, and leaders, such as Yes Bank, exist in the Indian landscape.

  • HSBC: This global banking giant has committed to achieving net zero emissions in its financing activities by 2050. They utilize the PCAF Global GHG Standard for Financial Institutions and actively engage with clients to transition towards low-carbon business models
  • Yes Bank: This leading private sector bank has partnered with international sustainability consultancy firms to develop a robust GHG accounting methodology. They are actively measuring and disclosing their Scope 1, 2 & 3 emissions and exploring innovative financing solutions for renewable energy projects. This is a particularly relevant example for Indian FIs as it showcases a proactive approach to measuring emissions and supporting the country’s clean energy goals

Given the existing strategies and best practices for Indian FIs to navigate the GHG accounting landscape, transparency and collaboration are crucial. Participation in initiatives like the PCAF helps develop standardized methodologies and share best practices, ensuring consistency and transparency.

Engaging with regulatory bodies such as SEBI and RBI is essential to shape effective ESG disclosure frameworks in India. Open dialogue ensures regulations are practical and beneficial for both FIs and the environment. Proactively communicating emissions reduction strategies and sustainability progress with investors builds trust and demonstrates a commitment to environmental responsibility.

Adopting a proactive approach to GHG accounting and financed emissions allows Indian FIs to mitigate climate risks, enhance financial resilience, and foster innovation. This positions them for long-term success and opens new opportunities in sustainable finance. By implementing these strategies, Indian FIs can lead in sustainable finance and contribute to a greener, more resilient economy.