ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Banks’ Credit Risk Analysis of Indian Firms

Impact of Climate Change

A firm-level panel data analysis of selected BSE top 200 companies for 2017–21 is presented to link the environmental, social, and governance ratings and carbon dioxide emissions with their default risk and solvency position. The results indicate strong empirical evidence that the firm’s risk of default is linked to its environmental performance along with the level of carbon emission. The findings will enable banks to establish a linkage between credit risk and climate change risk. This will assist banks as well as policymakers to adjust borrower-level ratings and factor the impact of climate change on their capital as well as business decisions.

Frequent events of natural calamities in various parts of the globe have raised concerns and warnings over the sustainability of business activities. Awareness of climate change and environmental risks on human lives and society have been rapidly increasing the world over. According to the latest Global Financial Report (2022), societal and environmental risks are the most concerning for the next five years. Further, environmental risks are perceived to be the five most critical long-term threats to the people and planet. This has been revealed from the Global Risks Perception Survey (GRPS). India has been ranked as the seventh worst affected, among 180 countries, in the Global Climate Risk Index 2021 (CRI 2021) of Germanwatch (Eckstein et al 2021). During COP26 (the 2021 United Nations Climate Change Conference), India declared its fivefold strategy to combat climate change risk. Commitments made included a reduction of 1 billion tonnes of carbon by 2030, reducing the carbon intensity of gross domestic product (GDP) by 45% by 2030, and achieving net-zero emissions target by 2070.

Sustainable development is the kind of development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Climate risk threatens our health, livelihood, and even the existence in the foreseeable future. Businesses and real estate sector firms are widely believed to be responsible for the fast depletion and degradation of the environment. There has been a rising trend in regulatory action towards defining the principles of sustainability and disclosures for organisations to adopt and comply with. Financial institutions and banks have also begun to feel the impact of these developments both directly and indirectly. Climate change risk has made it imperative for banks to take up sustainable finance. Concerns of sustainability hovers upon the comprehensiveness of credit appraisals and realistic assessment of cost and returns from projects. Assessment of climate risks in the balance sheet and loan portfolios of banks has become paramount. It is now established that the occurrence and interaction of physical risks (due to erosion in the value of financial assets and/or increase in liabilities) and transition risks (which arise from the process of adjustment to a low-carbon economy) will also aggravate the financial sector risks. The Reserve Bank of India (RBI) has also expressed its commitment to integrate climate change risks into financial stability monitoring.

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Updated On : 19th Jun, 2023
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