Climate risk in banks and NBFCs

A bank's climate risk sits mostly with its borrowers. If a flood shuts down small businesses in a district, their loans become harder to repay. If carbon prices and the EU's border tax squeeze steel exporters, their loans become riskier. If a coal plant runs fewer hours, it earns less to service its debt.

So climate risk is not a new kind of risk for a lender. It is a new cause of familiar risks: credit risk, collateral risk, market risk and reputational risk.

A lender is also linked to the emissions of the companies it funds. These are called financed emissions. They are the lender's Scope 3 emissions, and for most banks they are many times larger than the emissions from their own offices.

Channels from climate risk to a lender

Financed emissions and the PCAF standard

• The Partnership for Carbon Accounting Financials (PCAF) sets the most widely used method for measuring financed emissions. More than 680 financial institutions take part.
• The standard has three parts: Part A for financed emissions (loans and investments), Part B for facilitated emissions (deals a bank arranges, such as bond underwriting) and Part C for insurance-associated emissions.
• The core idea is attribution. A lender counts a share of each borrower's emissions equal to its share of the borrower's total financing. For a listed company, the share is the amount outstanding divided by the company's enterprise value including cash (EVIC).
• Each figure gets a data quality score from 1 (verified, reported emissions) to 5 (rough estimates from sector averages).
• An updated standard released on 2 December 2025 added methods for use-of-proceeds structures, securitisations and structured products, sub-sovereign debt, and optional reporting on undrawn loan commitments. It also added guardrails for reporting financed avoided emissions separately.

RBI's pilot climate stress test

In October and November 2022, RBI ran a pilot Climate Vulnerability Assessment and Stress Test with 15 public, private and foreign banks. It looked only at credit risk, using FY 2021-22 data and a static balance sheet. It was exploratory and did not set any capital requirement. A January 2024 RBI Bulletin article by RBI staff reported these results (the authors' views, not necessarily RBI's):

• Physical risk (short term): compared with the baseline, potential credit losses rose by about 66% in the flood scenario and about 66% in the cyclone scenario. A tail-risk event raised them by 138%.
• Transition risk (to 2050, using NGFS scenarios): in a disorderly "divergent net zero" path, potential credit losses were 110% higher in 2030, 130% higher in 2040 and 146% higher in 2050.
• Readiness: few banks included climate risk in their own stress tests, mainly because of data gaps, limited expertise and the lack of India-specific models and borrower-level climate data.

RBI's disclosure rules for lenders, including the February 2024 draft framework, are covered in the Climate Disclosure for Banks and NBFCs guide.

Global rules and groupings

• Basel Committee: on 13 June 2025, it published a voluntary framework for banks to disclose climate-related financial risks. Each country decides whether to adopt it.
• NGFS: the Network for Greening the Financial System, a group of central banks and supervisors that includes RBI, publishes the climate scenarios that most bank stress tests use.
• Net-Zero Banking Alliance: the UN-backed alliance of banks voted in October 2025 to stop operating, after many members left under political pressure in the United States. Bank net zero targets now rest mainly on each bank's own commitments.

Checklist for analysing an Indian lender

1. Sector exposure: loans to power generation, coal, oil and gas, iron and steel, cement, aluminium, aviation and real estate, from the annual report's sector split.
2. Geographic exposure: concentration of farm, MSME and microfinance lending in flood, cyclone or drought-prone districts.
3. Financed emissions: whether the lender reports them, the method (PCAF or other), the coverage of the loan book and the data quality scores.
4. Policies: any limits on new coal financing, and whether the lender has targets for high-emitting sectors.
5. Stress testing: whether climate scenarios are part of internal stress tests.
6. Green book: green deposits, green loans and their verification reports.
7. Governance: board oversight of climate risk, and whether a named committee is responsible.