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Sustainability in Banking | India

Supreeth Gopinath Bharati
05 Dec 2022

The banking industry in India has a positive influence on the country’s socio-economic progress and development. As India targets to achieve net zero by 2070, banking industry players have an important role to play in leading the financial services ecosystem towards sustainability.

Initiatives aiding the Banking Sector to embark on its Sustainable Transformation journey

India plans to generate 50% of its energy from non-carbon sources and aims to achieve the goal of 500 gigawatts of non-fossil fuel capacity by 2030. Aligned to such targets, the Indian banking industry envisions major initiatives aimed at attaining sustainability and ESG-linked financing for environmental conservation. Investments in Green Finance instruments and the launch of Green Banks with a focus on online banking and card-based transactions have created headlines in the Banking industry. Green infrastructure projects (such as the use of solar-powered uninterrupted power supply (UPS), general service lamps (GSL) or light-emitting diode (LED) bulbs, rainwater harvesting by banks,  solar-powered automated teller machines (ATMs), etc.) have been under way in the last five years.

According to the 2021 report by the Sustainable Banking & Finance Network (SBFN), India is now in the Implementation Phase in the progression matrix. As India plans to foray into the Maturity Phase, it plans ₹ 263 billion Sovereign Green Bond Issuance, which is the first initiative by the Indian government in green funding, useful to fund renewable energy projects (Source: Bloomberg, 2020).

Following are some of the key initiatives being implemented to enhance the banking industry’s sustainability focus in India:

  • Small Industries Development Bank of India (SIDBI), an independent government body, has introduced a new scheme called the ‘Sustainable Finance Scheme’ for funding sustainable development projects that contribute to energy efficiency and cleaner production like solar power plants, wind energy generators, mini hydel power projects, biomass gasifier power plants, etc. for captive/non-captive units.
  • Global Climate Fund (GCF), an international entity, (in collaboration with Indian banks including IDFC First Bank, National Bank for Agriculture and Rural Development (NABARD), Yes Bank, and SIDBI) has been successfully carrying out multiple projects, worth ₹ 43 billion, in the domains of e-mobility, solar rooftop, and climate resilience, which would reduce greenhouse gas (GHG) emissions by 20 million tons.
  • There has been an increase in the emphasis on Blended Finance, as public and private capital helps to blend and increase the pool of funds and development of credit lines, thereby creating a larger impact and increasing the viability of sustainable projects. There are 27 banks which have issued green loans/bonds/financing towards climate change mitigation as of March 2022.

Shifting consumer sentiments and increasing investor demands are driving the focus on Sustainability

A strong focus on sustainability will quite likely make the banking industry in India a key driver of low-carbon investments and community development projects. Following are the top three drivers for sustainability transformation in the banking industry:

For a successful sustainability transformation journey, banks must align themselves from outside-in and inside-out perspectives. An outside-in perspective includes encouraging eco-conscious customers and investors by pledging commitment to sustainability principles. The inside-out perspective includes building products and services and ensuring that internal process optimization is aligned to sustainability. To accelerate a future low-carbon economy, banks are taking steps towards mitigating the impacts of climate change by favoring investments in renewable energies and socially responsible businesses, over businesses that involve non-sustainable elements (such as fossil fuel companies).

Gain a head start in the Sustainability Transformation journey

Based on a recent study published by the Reserve Bank of India (RBI), amongst 34 leading Indian commercial banks a mere 6% of banks either have an existing green product or intend to offer one shortly. Moreover, only 35% of surveyed banks have dedicated coverage on sustainability, ESG, and climate risks on the company website. From a global perspective, the Indian banking industry can be considered as part of the ‘late majority’ in sustainability adoption. On the brighter side, 56% of these banks intend to bring sustainable lending at the forefront in the short to medium term. However, there is a strong need for clarity on the potential roadmap and the next best action.

Financial Institutions in India have a critical role to play in spearheading sustainability. Sustainable banking is to be approached as a win-win for the financial institutions as well as the industries and the economy. From a long-term perspective, financial institutions should aim at building a sustainable ecosystem from an outside-in (customers and investors) as well as inside-out (products, services, and internal operations). Below is a view of the potential roadmap a financial institution can leverage in their sustainability transformation journey.

Most banks in India would start the sustainability journey with issuance of green bonds and offering green lending products as a quick start. Building a sustainability roadmap for financial institutions starts with knowing the current state. The key is to perform a current state assessment across business functions/domains; this ensures accountability with qualitative and quantitative aspects of products/services, processes, people, and technology, suitably highlighted.

Furthermore, the next step is to commit ‒ set targets. Based on the current state assessment and a high-level understanding of the target state, specific, measurable, achievable, relevant, and time-Bound (SMART) targets are to be set.

Typically, alignment includes two areas ‒ people (stakeholders) and processes (strategy).Stakeholder alignment is one of the critical success factors for any initiative to be taken up and successfully executed. The leadership team ought to be aligned with the sustainable initiatives and the communication must percolate to each department and in turn to the individuals. Another area of alignment is to ensure sustainability is incorporated as part of the financial institution’s genes (strategy). Furthermore, strategy permeates into processes. For example, Kotak Mahindra Bank adopted sustainability within its operations and processes. It was well accepted by the leadership and adopted as a strategy. With ‘Think Green’ as a strategic initiative, the bank supports adoption of environmentally sustainable technologies and processes, and also focuses on reducing the carbon footprint.

The next step of plan and act requires prioritization, planning, and implementation. With a detailed current state assessment and target setting, there would be multiple initiatives across business functions to act upon. However, without a structural approach towards acting on the initiatives, it is likely that business functions within financial institutions are soon to reach a dead end or wind up making redundant efforts. It is critical to prioritize the initiatives and categorize them into logical buckets (e.g., vital, essential, and Desirable), and further look for execution priorities such as quick wins. Identifying the dependent initiatives or peripheral activities is part of this stage as well. With a timeline in mind implementation plans are drawn, indicating the dependencies, resources involved, and potential risks including mitigation plans. Further, monitor and report is all about setting up the right metrics to measure and the right governance for reporting. What gets measured, gets acted upon. The outcome of measuring and reporting must eventually form a feedback loop to ensure course corrective actions are taken into consideration.

Some Indian banks have well adopted the above-mentioned sustainability transformation roadmap. The key milestones highlighted in the IndusInd Bank and the ICICI Bank success stories indicate the efficiency and effectiveness of the adoption.

State Bank of India (SBI), an early adopter of sustainability in India, merits a mention here. In 2018, the bank issued two green bonds under the Green Bond Framework to re-finance its green projects worth ₹ 53 billion and ₹ 4 billion. In 2019, SBI launched the country’s first Green Car Loan to encourage customers to buy electric vehicles. It also introduced a Green Reward Points program for its ‘You Only Need One’ (YONO) customers. Through this YONO SBI Green Fund, the bank plans to introduce environmental conservation activities.

Another bank worth mentioning here is HDFC Bank. From an outside-in perspective HDFC launched SmartUp, unique funding and grant scheme developed to encourage social sector startups engaged in activities that can benefit the society. Further, from an inside-out perspective, HDFC bank is taking up various measures in reducing the carbon footprint by enhancing employee awareness in waste management, paper use, and energy efficiencies.

Indian banking sector has an important role to play in India’s Sustainability journey ahead

Although sustainability in banking is still in its nascent stage in India, a few of the banking majors have reached significant milestones in the sustainability transformation journey. Research indicates that Indian banks have a lot to learn from global banking players. The banking industry has a bigger responsibility to proactively enhance its capabilities and offerings to lead by example, as India inches closer towards achieving its ESG goals.