According to the World Bank, Sustainable Finance is the process of taking due account of Environmental, Social and Governance (ESG) of a company while making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects.
While the core concept of ESG investing has existed for centuries, the recent genesis of ESG can be traced back to the early days of Socially Responsible Investing in the 1980s when many investors used a value-based approach to exclude certain sectors, companies and stocks that they considered morally inferior or having a detrimental impact on the society. By early 2000s, various studies showed that companies that were more responsible were also financially superior to their peers. This was also underscored by cases where irresponsible business practices had led to significant damage to the environment, communities and the economy. Case in point were Enron and Bhopal Gas Tragedy. Thus, emerged an awareness amongst the investor community that assessing the financial performance of a company is not enough and that an organisation’s overall performance is also linked to non-financial, yet material issues that could have a financial impact and which pose significant material risks to long term returns. ESG are those set of non-financial parameters, which along with financial metrics, provide a holistic assessment of an organisation’s performance. Even United Nations provides a shared blueprint for peace and prosperity for people and the planet with its 17 Sustainable Development Goals (SDG) including Climate action, Reduced inequalities, No Poverty, sustainable cities and communities, affordable and clean energy, Gender equality amongst others.
Evolving ESG-focused Banking Sector in India
For the Banking sector, structured financial flows that channelise funds to initiatives and projects, which aim to mitigate climate change and contribute to sustainable development, has been gaining momentum, globally. In India, the financial sector continues to see major regulatory actions and developments on the ESG front. The RBI’s ‘Discussion paper on Climate Risk and Sustainable Finance’, published this year, highlighted the risks posed by climate change to the Banking sector and called on banks to take preparatory actions. With a view to foster the development of a green finance ecosystem in the country and to augment the flow of finance towards green activities, the RBI also introduced a framework for acceptance of Green Deposits. RBI is further expected to issue a disclosure framework for climate-related financial risks and guide banks on protecting their portfolios through climate scenario analysis and stress testing.
Further, a slew of measures to strengthen and standardise ESG disclosures through mandatory Business Responsibility and Sustainability Report (BRSR) by SEBI has become applicable to the top 1,000 listed companies, with the intent to align financial and non-financial disclosures and to increase transparency. These developments underscore the growing importance of aligning the objectives of India’ banking sector and leading corporates with the country’s sustainable development agenda and global best practices in ESG.
ESG adoption by India’s banking sector
Globally, increasing number of loans are being aligned to link them to the respective borrowers’ ESG performance. Emphasis on ESG is increasingly growing with major institutional investors expecting the companies they invest in are committed strongly to adopting ESG criteria.
In India, leading public and private banks are already supporting climate-aligned sectors like renewable energy, electric vehicles, battery storage and developing targeted products for green financing such as rooftop solar loans for the Small and Medium Enterprises (SMEs).
Several leading banks have announced to become net zero by 2030 or be carbon neutral by 2031-32. Some of the measures include switching key facilities to renewable energy, adopting zero liquid discharge facility. Banks are also increasingly digitising paper-based products and processes, establishing strong digital strategies and implementing paperless workflows, thus benefiting the environment along with improved customer service.
Some of the leading private banks have started adopting a structured approach towards responsible lending, by instituting an Environment and Social Risk Management System (ESMS) to assess and mitigate Environment and Social risks of its financing activities.
Towards adopting socially responsible goals, leading private banks are also prioritizing focus on improving gender diversity by increasing the percentage of women staff and recruiting persons with disabilities. Banks are also aligning their ESG framework to UN Sustainable development goals with increased focus on furthering financial inclusion, focus on microfinance and rural transformation.
Few leading banks have also put a robust governance framework with Board-level and Executive-level committees overseeing their ESG strategy.
The end goal: People, planet and profit
While many banks, both public and private banks, have already started adopting ESG standards, there is still a long way to go for India’s overall banking system, to adopt ESG norms as part of overall lending models. As challenges such as climate change, environmental degradation, income and gender inequality, redefine the paradigms of this century’s economy, true value creation must not be limited to financial capital, but also encompass an organisation’s aggregate impact on people, planet and profit.
Views of the author are personal and do not necessarily represent the website’s views.
Garima leads CSR at YES BANK and is the CEO of YES Foundation. She is a purpose led professional inspired by the ability of individuals and organizations to make a positive contribution to society. A post graduate from Tata Institute of Social Sciences and a certified Sustainability leader from London Business School, Garima has over 15 years of experience across sectors. Her varied experience of working closely with communities and social impact organizations has helped her successfully build and implement business aligned CSR strategies.
Garima leads CSR at YES BANK and is the CEO of YES Foundation. She is a purpose led professional inspired by the ability of individuals and organizations to make a positive contribution to society. A post graduate from Tata Institute of Social Sciences and a certified Sustainability leader from London Business School, Garima has over 15 years of experience across sectors. Her varied experience of working closely with communities and social impact organizations has helped her successfully build and implement business aligned CSR strategies. 
