India’s financial sector is highly exposed to the risks of the economy transitioning from being largely dependent on fossil fuel to clean energy. This was revealed by a study published in the Global Environmental Change journal.

 

Highlights of the report

  • Analysis of individual loans and bonds exposed to sectors dependent on fossil fuel —
      • The report revealed that 60% of lending to the mining sector was for oil and gas extraction.
      • One-fifth of manufacturing sector debt is for petroleum refining and related industries.
      • Electricity production – by far the largest source of carbon emissions – accounted for 5.2% of outstanding credit.
      • This reveals that India’s financial sector is highly exposed to the activities related to fossil fuels.
      • Hence, any transition from fossil fuel to clean energy will have a negative impact on this sector.
  • Shortage of experts to advise the institutions on such a transition —
      • The report noted that there was a shortage of experts in India’s financial institutions who had the expertise to appropriately advise the institutions on such a transition.
      • Very few financial institutions collect information on environmental, social and governance (ESG) risks and these firms do not systematically incorporate that data into financial planning.
      • This will affect the countries who are planning for orderly transition to net-zero.
  • High-carbon industries have less financial capacity to respond to shocks and stresses —
      • High-carbon industries — power generation, chemicals, iron and steel, and aviation — account for 10% of outstanding debt to Indian financial institutions.
      • However, these industries are also heavily indebted, and therefore have less financial capacity to respond to shocks and stresses.
      • This will further expose India’s financial sector to the risk associated with the transition.
  • Financial decisions are locking the country into a more polluting, more expensive energy supply —
      • The financial decisions of Indian banks and institutional investors are locking the country into a more polluting, more expensive energy supply. For example, only 17.5% of bank lending to the power sector has been to pure-play renewables.
      • Consequently, India has much higher electricity from carbon-sources than the world average.
        • Coal currently accounts for 44% of India’s primary energy sources and 70% of its power (electricity).
        • The country’s coal-fired power plants have an average age of 13 years and India has 91,000 MW of new proposed coal capacity in the works, second only to China.
        • According to the Draft National Electricity Plan 2022, coal’s share in the electricity generation mix will decrease to 50% by 2030
  • Tremendous opportunity for financial sector if they ramp up their capacities relatively quickly —
      • The current lending and investment patterns reveals that India’s financial sector is heavily exposed to potential transition risks.
      • However, the other side of risks is the tremendous opportunity to move finance towards sustainable assets and activities.
        • In 2021, PM Modi committed India to reach net-zero emissions by 2070.
        • India has also announced plans to source half of its electricity needs (50%) from non-fossil fuel sources by 2030.
        • This will require financing to the order of at least a trillion dollars to meet these commitments.