Indian government’s ability to attract private investment and address negative spillovers from decarbonization, including job losses in legacy industries, will determine whether India’s credit exposure to carbon transition and social risks rises further, Moody’s Ratings said on Thursday.
“India has made rapid progress in building its renewable capacity. But, its fast-growing economy, and large and expanding population, will drive up demand for energy and products from carbon-intensive sectors,” Moody’s said.
Reserve Bank of India (RBI) has released a draft climate-related risk disclosure framework, requiring all commercial banks and major nonbanking financial companies to manage climate risks. Some have started to take steps on governance and strategy aspects. However, risk assessment and management is at a nascent stage.
India has high credit exposure to environmental risks, including rising temperature, water stress and pollution, it said. It is also highly exposed to social risks, given income inequality, health and safety concerns, and limited access to basic services. Growing climate-related shocks could increasingly impair activity in sectors such as agriculture and informal services, and exacerbate economic and social risks.
Early investment in transition would mitigate these risks, but financing needs will be sizable.
“For the power sector alone, we estimate additional spending to put India on a path to global net zero at around 3.4% of GDP per year from fiscal 2024-25 through fiscal 2030-31, more than most other large GHG emitters. India’s private sector bears almost two-thirds of climate mitigation investment currently and is likely to continue to contribute significantly,” Moody’s said. The government is unlikely to ramp up spending to close the investment gap given its emphasis on fiscal consolidation, it said.
While transitioning to a low-carbon economy should mitigate climate risks over time, it could exacerbate certain social risks, Moody’s said.
Ensuring that workers in carbon-intensive industries and their communities are not left behind will not be easy. For example, decarbonizing the agricultural sector – which accounts for 43% of total employment as of 2022, according to the World Bank – could result in a significant skills mismatch, increasing unemployment, and leading to wider income disparity and social unrest.
Indian banks, which lend substantially to carbon-intensive sectors with high exposure to carbon transition risk, are likely to take gradual steps to decarbonize their loan books.