Updating credit assessment: Banks eye common social, climate framework

Updating credit assessment: Banks eye common social, climate framework

Banks are looking to create a common framework for environmental, social and governance (ESG) issues while carrying out credit assessment and include climate risk as part of their risk management policy.

A senior executive told ET that the Indian Banks’ Association (IBA) is looking into the matter.

Prime Minister Narendra Modi said on Monday at the COP26 global climate summit that India will meet a target of net zero emissions by 2070.

“Already, international investors have started demanding information about the ESG policy of the companies before investing into the equity and liability products. The time is conducive to decide about the ESG framework for Indian banking,” the executive said on condition of anonymity, adding that companies are aligning their policies with the commitment their countries are agreeing to.

Another executive, who did not wish to be identified either, said, “Right now we are looking at whether to share the best practices followed across the globe and leave it to the individual banks to decide on adoption of policy best suited to them or create a framework and give it to member banks to build on that.”

Experts said banks need to plan in accordance with the country’s climate goals, and that managing climate risk for a sustained growth is what the ESG framework ensures.

“Banks, being a conventional provider of debt capital, also want climate risk mitigated for sustained growth and recovery of capital,” said Dinesh Anand, national managing partner – Risk & ESG at Grant Thornton Bharat.

Another senior banker said already some lenders are following their individual policies at some level and that there needs to be an agreement on the common metrics before attempting to implement them. “The effects on risk assessment need to be understood and it may take some time to arrive at a consensus,” he said.

Last month, the chairman of the country’s largest bank, State Bank of India (SBI), Dinesh Kumar Khara, had said the bank was also in the process of identifying climate risks that have the potential to generate a substantive change in business.

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