India's largest banks are taking steps to evaluate their own and their borrowers' carbon footprint, aiming to mitigate financial risks under mounting pressure from regulators and investors to align their Environmental, Social, and Governance (ESG) reporting with global standards, according to sources cited by Reuters.

India, ranking as the world's third-highest greenhouse gas emitter, has set a target to achieve net zero emissions by 2070. However, the country's financial sector trails behind other major economies in reporting Scope 3 emissions, primarily lending-related emissions, which significantly contribute to the sector's carbon footprint.

Moody's, a rating agency, reported that approximately 25% to 35% of Indian bank loans are directly linked to carbon-intensive sectors such as coal mining and diesel-intensive transportation. The lack of climate-risk disclosures could diminish a bank's appeal to global investors, and a delayed transition to environmentally friendly business models might increase borrowing costs for companies, analysts noted.

Alka Anbarasu, Associate Managing Director at Moody's Investors Service, highlighted the substantial demand from international investors and asset managers for more sustainability disclosures and a move toward low-carbon economies. She emphasised that pressure from investors and financiers could lead to higher funding costs for banks.

To initiate this transition, the Reserve Bank of India (RBI) and the lenders' association have been encouraging local banks to recognise climate-related financial risks on their balance sheets. Banks like Union Bank of India, IndusInd Bank, Indian Bank, and Bank of India have committed to evaluating their financed emissions, while ICICI Bank, Axis Bank, and Federal Bank have already assessed such exposures, as per sources within these banks.

State Bank of India, the country's largest lender, sought proposals from consultants in August to measure the carbon footprint of its loan book. Once the audit is complete, banks may consider increasing lending to sectors like renewable energy and electric vehicles, according to an official from a large public sector bank.

Although the RBI has yet to issue formal guidelines on green financing, it announced plans in May to establish a disclosure framework. Despite repeated attempts, Reuters received no response to their inquiries from RBI or the Indian Banks' Association.

Private banks are also facing pressure from global investors demanding enhanced climate-risk disclosures from financial institutions. Olivia Lankester, Director of Responsible Investing & Sustainability at Federated Hermes, a US-based investment management firm with Indian investments, stated that banks are expected to assess and report their Scope 3 emissions and establish a net-zero target aligned with the Paris Agreement. Moody's Anbarasu pointed out that the growing demand from investors could result in increased funding availability for eco-friendly projects or banks dedicated to sustainability initiatives.