Indian Banks Still Unprepared for Climate Risks, New Report Warns

India’s banking sector is gradually improving its climate-related disclosures and sustainability reporting, but a new report suggests that most banks are still treating climate preparedness as a compliance exercise rather than integrating climate risks into core financial decision-making.

A report released by Bengaluru-based think tank Climate Risk Horizons has highlighted major gaps in how Indian banks are responding to climate risks, even as environmental challenges such as floods, heatwaves, droughts, and extreme weather events increasingly threaten financial stability.

The study examined 35 Indian banks with a combined market capitalisation of nearly ₹50 trillion and assessed how effectively they are managing climate-related financial risks.

The findings reveal that while banks are improving disclosure standards due to pressure from the Reserve Bank of India (RBI), meaningful integration of climate risk into lending strategies, portfolio management, and long-term planning remains limited.

The report also underscores the growing need for banks to prepare for a low-carbon economy as global financial systems move toward stricter sustainability frameworks and Net Zero commitments.

Indian Banks Improve Climate Reporting but Lag in Strategy

Regulatory Compliance Driving Progress

According to the Climate Risk Horizons report, Indian banks have made notable progress in climate-related disclosures over the past few years.

The analysis evaluated banks on ten important criteria, including Climate Scenario Analysis, Board-Level Oversight of Climate Risk, Coal Policy, Emissions Disclosure, and Net Zero Targets.

The report found that 92% of Indian banks now disclose Scope 1 and Scope 2 emissions, while 63% obtain third-party verification of their emissions data. Additionally, most banks now have some form of board-level oversight related to climate risk.

Among the top performers in climate preparedness were Yes Bank, Union Bank of India, and Punjab National Bank.

However, the report warns that much of this progress is being driven by regulatory pressure rather than proactive climate strategy.

“This is progress from much lower levels reported in our previous analyses. While this reflects better regulatory compliance, it is still more procedural than strategy-driven,” the report stated.

Banks Yet to Fully Understand Climate Risks

Limited Integration Into Financial Decision-Making

Despite improvements in reporting standards, many banks are still not integrating climate risks into actual business and lending decisions.

“Banks are making slow progress, and most of it is being driven by RBI regulations. But the next step is just as important—banks need to understand more specifically how climate change is affecting their portfolios and overall financial health, and integrate that learning into their business behaviour,” said Anusha Das, lead author of the report.

The report points out that only a small number of banks are taking stronger measures such as calculating financed emissions, implementing coal phase-out strategies, or conducting detailed climate scenario analysis.

Financed emissions — which refer to emissions linked to a bank’s lending and investment activities — represent the largest portion of a bank’s climate impact. Yet only five banks currently disclose financed emissions data.

This highlights a major gap in understanding how bank lending contributes to carbon-intensive industries and long-term climate exposure.

Coal Financing Remains a Major Concern

Few Banks Have Coal Exit Policies

The report also raises concerns regarding continued exposure to coal financing.

Only Federal Bank and RBL Bank have announced clear coal phase-out commitments, while Union Bank of India has made a limited pledge without a fixed timeline.

As global investors increasingly move away from fossil fuel financing, Indian banks could face long-term financial risks if they continue supporting carbon-intensive sectors without transition planning.

Climate experts warn that stranded assets, stricter environmental regulations, and global decarbonisation policies could significantly affect loan portfolios linked to coal and other high-emission industries.

Net Zero Commitments Remain Limited

Scope 3 Emissions Still Largely Ignored

The report found that only 6 out of 35 banks have announced Net Zero targets.

More importantly, only two banks — State Bank of India and Punjab National Bank — include Scope 3 emissions within their Net Zero commitments.

Scope 3 emissions refer to indirect emissions generated through financing activities, supply chains, and investments, which often account for the largest share of financial institutions’ environmental impact.

Without including Scope 3 emissions, experts argue that climate targets remain incomplete and fail to reflect the true carbon exposure of banking operations.

Climate Risk Oversight Still Weak

Scenario Analysis Lacks Transparency

Although 34 banks now report some level of board oversight on climate-related issues, only 22 explain how climate risks influence lending decisions, credit policies, portfolio alignment, or risk appetite.

In addition, while 14 banks claim to conduct climate scenario analysis or stress testing, none publicly disclose how these assessments could affect their assets, capital positions, or financial stability.

This lack of transparency limits the effectiveness of climate risk management and reduces investor confidence in long-term preparedness.

“The economic impacts of physical climate risks such as floods, heat, and drought are worsening. Climate risks cannot be treated as peripheral sustainability concerns. They affect borrower cash flows, collateral quality, and portfolio stability. Indian banks now need to integrate adaptation and resilience into transition planning and support investments that strengthen resilience on the ground,” said Sagar Asarpur, co-author of the report.

Why Climate Action Matters for Indian Banks

Financial Stability Increasingly Linked to Climate Risks

Climate-related risks are no longer considered only environmental concerns. Global financial regulators now view climate change as a major threat to financial systems, insurance markets, investments, and credit stability.

Extreme weather events can directly impact borrowers’ repayment capacity, disrupt businesses, damage infrastructure, and reduce asset quality across loan portfolios.

India remains particularly vulnerable to climate risks due to rising temperatures, floods, droughts, and dependence on climate-sensitive sectors such as agriculture and energy.

The RBI has already begun encouraging banks and financial institutions to strengthen climate-risk disclosures and sustainability reporting frameworks in line with global standards.

The Way Forward for Indian Banking

Moving Beyond Compliance

The Climate Risk Horizons report recommends that Indian banks move beyond compliance-focused approaches and integrate climate considerations into core operational and strategic decisions.

The report calls for:

• Wider disclosure of Scope 3 emissions
• Clear coal financing phase-out timelines
• Stronger climate scenario analysis
• Better climate data and risk tools
• Sustainable credit appraisal systems
• Integration of climate risks into capital planning

Banks are also being encouraged to invest in internal climate expertise and resilience-building strategies to prepare for future economic disruptions linked to climate change.

Conclusion

Indian banks are making measurable progress in climate disclosures and sustainability reporting, but the overall pace of climate action remains slow and largely compliance-driven. While RBI regulations have pushed banks toward better reporting practices, the sector still faces significant gaps in integrating climate risks into lending strategies, investment decisions, and long-term financial planning.

The Climate Risk Horizons report highlights that climate change is no longer just an environmental issue — it is a financial risk capable of affecting portfolio stability, borrower performance, and economic resilience. As global climate regulations tighten and investors increasingly focus on sustainable finance, Indian banks may face growing pressure to accelerate their transition toward greener financial systems.

To remain resilient in a rapidly changing economic environment, banks will need to move beyond procedural disclosures and develop comprehensive climate-risk strategies that align financial growth with long-term sustainability goals.