Green finance: India’s banks looks to join the race to net zero

We speak of green in speeches so grand,
Yet policies lag, like feet stuck in sand.
Finance moves slow, like tea left to steep,
While the climate clock ticks — no time to sleep!
Will urgency arrive, or just more ‘plans’ we keep?

The urgency around green finance is no longer a distant subject reserved for international and domestic conferences; it has arrived at the doorstep of every major economy. As the world’s fifth-largest economy and one of the most vulnerable to climate change, India must not only participate in this green transition, but lead it. However, while policymakers and financial regulators increasingly champion sustainability, there remains a significant gap in clarity, coordination, and urgency required to make green finance a cornerstone of India’s future growth.

India has set ambitious targets for renewable energy and decarbonisation, committing to net zero emissions by 2070. In its recent Report on Currency and Finance, the Reserve Bank of India (RBI) recognised climate change as a huge threat to financial stability, noting that extreme weather events could reduce India’s GDP by 2-6% annually by 2030. The pressing question is whether India’s financial sector, still heavily reliant on traditional industries, is prepared to integrate sustainability into its operations at a pace that meets these challenges. For that to happen, the boards of financial institutions, especially banks, must act decisively.

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Role of financial institutions

A key issue lies in knowledge and governance. The boards of financial institutions play a critical role in steering their organisations towards sustainable practices. Banks, more than any other institutions, have a dual role as both profit-driven entities and powerful agents of social change. They can shape societal behaviours and drive transformative change, particularly in sustainability. The question is whether banks fully understand green and sustainable business models and whether they have the capacity to assess their exposure to industries that may hinder India’s journey toward net zero emissions.

To be fair, banks have long been at the forefront of societal and economic leadership, navigating centuries of human evolution and guiding the changes brought by various industrial revolutions. Yet, the challenge they now face is to reimagine life and economic frameworks within the constraints of carbon-heavy industrial models. This shift disrupts traditional risk assessments and financial strategies, compelling them to rethink how they can support the transition to a low-carbon economy without compromising profitability.

Unfortunately, banks are often too focused on short-term financial performance, prioritising quarterly profits over the long-term environmental sustainability critical to societal well-being. This fixation on immediate returns risks undermining their potential to foster lasting change, as they overlook their broader responsibility to balance profitability with a sustainable future. This issue is not unique to India, but it is especially problematic in a country where climate risks are both imminent and material. According to the RBI, financial institutions face significant exposure to climate-related risks, particularly through lending to carbon-intensive sectors. Therefore, bank boards must integrate environmental risks into their decision-making processes, balancing profitability with sustainability.

One way forward is to establish clear key performance indicators (KPIs) linked to sustainability. Globally, many boards are now being evaluated on ESG (Environmental, Social, and Governance) performance, and Indian institutions must not lag behind. Carbon reduction targets, resource efficiency, and environmental impact assessments must become as central to boardroom discussions as traditional financial metrics.

The relationship between sustainable practices and financial stability should not be seen as adversarial; in fact, they are increasingly intertwined. The Network for Greening the Financial System (NGFS), a coalition of central banks and supervisors, has made it clear that climate-related risks represent a material threat to financial systems globally. This is equally true for India, where a combination of floods, droughts, and rising temperatures threatens both agricultural output and industrial productivity. As the RBI report highlights, the financial impact of climate change could be catastrophic if banks and regulators fail to take pre-emptiveaction. Financial stability cannot be achieved without embracing sustainable finance.

Green finance and financial stability

Embedding sustainability into financial institutions, however, introduces new complexities. Traditional risk management frameworks may not fully account for the unique risks posed by climate change, such as stranded assets or abrupt regulatory shifts. India’s banking sector, already burdened with non-performing assets and legacy issues, must innovate to develop tools capable of assessing and mitigating climate-related risks. The financial risks of failing to invest in green initiatives far outweigh the costs of transitioning to sustainability.

Without a unified framework, it is impossible to distinguish genuinely sustainable finance from greenwashing. Other major economies, such as the European Union, have already made strides in creating comprehensive taxonomies that provide clarity for investors, financial institutions, and regulators. India, however, remains in the early stages. The absence of a well-defined green taxonomy creates confusion in the marketplace, leading to capital misallocation and, ultimately, undermining efforts to achieve genuine sustainability.

Cross-sectoral coordination will be crucial for integrating green finance into India’s broader economic strategy. Financial institutions alone cannot drive this transition. The success of green finance depends on the active participation of sectors such as energy, agriculture, and manufacturing—industries responsible for the bulk of India’s carbon emissions. The energy sector, for instance, is critical to India’s climate ambitions, yet its transition from coal to renewable energy has been slow and uneven. Similarly, in agriculture, there is growing interest in sustainable farming practices, but financial support for these initiatives has been patchy at best.

The RBI has made notable progress in addressing the intersection of green finance and financial stability. In its biannual Financial Stability Report, the RBI emphasises the importance of integrating climate risks into banks’ stress testing. These initiatives are steps in the right direction, but they need to be matched by policies that foster better coordination between regulators, industries, and the financial sector.

A multi-stakeholder approach will be essential to ensure green finance is not just a talking point but a transformative force. The RBI report estimates that a delayed climate transition could lead to increased borrowing costs for Indian firms, raising financing costs by as much as 20% for those exposed to high-carbon risks. Ultimately, India’s approach to green finance will be judged by its own economy in the next decade and how the banking sector performs in the journey toward net zero.