Global Environmental Change Report

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.