Ashish Kapur
The IFRS Sustainability Standards, which incorporate worldwide recommendations from climate task forces and G20 nations among other stakeholders, are effective since January 2024 on a voluntary basis. Climate action taken by the Indian market and banking regulators is consequently warming up, too.
For the largest 1,000 listed Indian corporates which includes banks, Business Responsibility and Sustainability Report (BRSR) disclosures are already mandated by the Securities and Exchange Board of India in line with IFRS-Sustainability. The BRSR core reporting subset introduced for assurance and eliminating greenwashing, which is applicable for the top 150 companies in FY24, has more disruptive potential. Amidst multiple key performance indicators under nine environmental, social and governance attributes of BRSR-core, corporates are required to disclose metrics such as scope 1 that covers emissions from directly owned carbon sources, scope 2 for indirect emissions from purchased sources and scope 3 for upstream and downstream value chain emissions.
Similarly, last month the Reserve Bank of India released the impressive climate related financial risk disclosure draft that seeks to avoid mispricing of assets and capital misallocation by regulated entities (REs). Subject to final guidelines, banks and other REs are required to make baseline and enhanced risk disclosures across four globally consistent pillars of governance, strategy, risk management and metrics and targets from FY26 onwards. The big elephant in the room is quantifying the emission contribution of financed assets.
These guidelines are stimulating deep conversations within listed corporates and REs on reworking business strategy as well as reimagining climate mitigation and adaptation. A few inter-sectoral collaborative strategies that marry key asset-side components of financier balance sheets with green priorities of stakeholders including communities, businesses and governments are outlined here.
The first concerns the ‘construction-built environment’ that contributes ~40% of global carbon emissions annually—both ‘operational carbon’, i.e. everyday energy needed to power buildings, and ‘embodied carbon’, i.e. materials that go into making them.
Solar rooftop (climate mitigation) in built-up urban centres could be accelerated and output efficiencies amplified by integrating design requisites including battery storage while constructing the building, rather than attempt fitment compromise with a fully finished product later. Similarly, rainwater harvesting capex (climate adaptation) must be developed when city infrastructure is being built, as warmer temperatures and erratic rainfall coupled with high demand are drying up reservoirs causing numerous supply cuts. Promoting green steel and cement manufacturing to reduce carbon heavy footprint of traditional processes via electric or green hydrogen-powered furnaces and recycling industrial waste like slag, fly ash is again welcome. Yet, incentivising commercial and residential sector for utilising such material inputs to construct new India’s built environment is equally crucial.
So, if urban planners push developers to incorporate solar power on analogous terrace tops, rainwater harvesting systems, ecofriendly cement/material and energy efficient, non-polluting building technologies in all new or redeveloped high-rise complexes, not only can short tenor, blended capex financing be structured on milestone completion but a good chunk of mortgage lending could also be made green. This will entail securing bankability of building projects and risk-sharing by nodal agencies with government legislative support in lieu of upfront subsidies, leveraging higher intensity of realty development via floor space index incentives, and mobilising concessional global finance by existing financiers or a dedicated climate bank.
Micro, small and medium enterprise funding is another priority segment to focus on. Large companies, having an extensive vendor base and footprint across the countryside, can assist their value chain migrate slowly to the green economy.
By suitably leveraging the bigger corporate’s credit standing with financiers, raising concessional transition finance by micro and small suppliers is doable, as even Centre-sponsored renewable energy, waste or water treatment schemes require some promoter contribution. Elective scope-3 ecosystem emission targets of corporates may thus be tackled before any mandated deadlines, without over-reliance on corporate social responsibility funds.
Finally, development financiers, especially those with access to significant low-cost dollar or eurozone green capital besides export credit agency arrangement capabilities, could be encouraged to co-finance climate-positive public capex in conjunction with local government or project authorities. For instance, to enhance protection of communities and coastal infrastructure including roads and bridges coming up rapidly along shorelines, innovative solutions like evaluating mangrove afforestation near breakwater embankments or creeksides would yield substantial mitigation and adaptation benefits.
Given that the regulatory nudges also mandate board oversight and link executive compensation to granular green performance metrics, for-profit businesses must warm to increasingly intense climate action through ingenious inter-sector collaborations.
(The author is is a certified treasury manager and corporate banker. Views are personal.)