The notion that economic growth necessarily leads to prosperity is increasingly being questioned.[1] Amid rising environmental degradation, ecological breakdown, and widening inequality there is growing consensus that economies – and the businesses that drive them – need a critical reexamination of their objectives and outcomes.
The concept of double materiality has taken root in this institutional environment; it asks that firms factor and disclose not just development and environmental risks to their businesses, but how their actions (including ones that are sustainability-led) impact the wider society, environment, and the economy.[2]
As climate-linked impacts become more frequent and pervasive, such considerations are gradually being adopted by “just transition”[3] frameworks across economies and sectors. And yet, we argue, there is some way to go before the construct of “just” is widened, particularly by financial actors, to encompass physical climate risks and community resilience more concretely in the Global South. A case in point is the conceptualization and governance of climate-related financial risks (CRFR) in an emerging market like India.
CRFR was conceived by the financial community in 2015 to highlight how climate change – both physical risks as well as stranded carbon assets produced by transitioning to a low carbon economy – could disrupt the global economy and impact financial stability.[4] CRFR has paved the way for multi-stakeholder, industry-led deliberations culminating in the creation of key formal bodies such as the Task Force for Climate-related Financial Disclosures or TCFD.[5] Since their release in 2017, recommendations by the TCFD have been widely endorsed and adopted by corporates, governments, and financial institutions across the globe. These recommendations are centered around the idea that climate change is a market externality and the pricing and disclosure of climate risks by individual firms can restore market discipline.[6]
In India, the Reserve Bank of India (RBI), the country’s central bank, has been at the forefront of conversations on CRFR. RBI joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) some years ago and much of its narrative on CRFR builds on knowledge produced in such transnational settings. A review of RBI’s policy literature on CRFR indicates that climate-related financial risks in India have been constructed as risks to the country’s financial stability and must be managed as such.[7]
This micro-prudential approach to managing financial risks, however, requires a closer look at India’s interventionist policy context which entails mandated lending to sectors and communities that may not have easy access to capital in a market-led economy. Two policies, for instance, have historically co-opted the banking sector to meet India’s poverty alleviation and stabilization agendas: the country’s financial inclusion program[8] and the priority sector lending scheme (PSL).[9] Under the PSL scheme, domestic commercial banks are mandated to allocate 40 percent of their net bank credit to priority sectors such as agriculture, micro enterprises, education, housing etc.[10] PSL also includes a sub-category called weaker sections which constitutes lending to some of India’s most marginalized caste, class, and communal groups.
