Increased frequency of climate-related extreme events in the Himalayan region is leading to project delays and losses as well as cost overruns. The challenge confronting India’s massive financial sector is whether it will be able to incorporate climate-induced financial risks in a meaningful way.
The Indian financial system is quite literally facing a Himalayan challenge. As the Himalayan region veers down the climate precipice with rising temperatures, unprecedented rains, floods, landslides, avalanches and threateningly expanding glacial lakes, it has become a critical site for what bankers refer to as climate-related finance risks. All big investments such as dams, tunnels, highways, solar parks and transmission lines dotting the mountain region, and those at the planning stage, are at risk of physical destruction owing to climate-related extreme events. As a result, investing institutions are staring at rising costs and possible losses.
How should Financial Institutions (FIs) such as banks and non-banking financial institutions take into account climate-induced risks while extending big credit for projects in the increasingly vulnerable Himalayan region? This is the question that looms large as we observe yet another World Environment Day today.
The numerous guidelines issued by the Reserve Bank of India (RBI) to banks and other FIs on how to incorporate ‘climate-related financial risks’ face the Himalayan test, especially when India is on a building spree on its seismically sensitive mountains.
The Rising Graph of Himalayan Vulnerability
The recent spurt of disasters—unprecedented rain episodes, floods and landslides—witnessed in the Himalayas are highlights of the grim futures prophesied by science. The State of India’s Environment 2024 report by the Centre for Science and Environment reveals that nearly half (44 per cent) of all climate-related events recorded in India between 2013 and 2022 took place in the Himalayan region.
The Central Water Commission’s report from October last year pointed to the rapid growth of glacial lakes and water bodies across the Himalayas. As global temperatures rise due to industrial activity-driven climate change, the third pole is melting at an alarming rate, causing these lakes to expand dangerously.
This spells trouble for both the residents and sensitive ecosystems of the Himalayan state, as well as for communities downstream. It also poses serious risks to the current and upcoming large power generation projects and connectivity infrastructure in the region.
Another comprehensive research surveyed climate emergency impacts on the Indian Himalayas to develop a ‘climate-change-induced risk index’, as per the recent framework proposed by the Intergovernmental Panel on Climate Change (IPCC), and put the writing on the wall. It found that the Indian Himalayas are both more exposed to hazards and are highly vulnerable to climate-induced disasters.
Climate-Induced Financial Risk
This is exactly what constitutes climate-induced financial risk. Climate-related hazards in the Himalayas are collapsing dams and tunnels, washing away roads, submerging villages and towns with water and debris. From the banking perspective, all this translates into grave financial risk. Investing institutions have high exposures in all such assets.
Infrastructure projects in the Himalayas are beset with cost overruns and potential losses owing to what is seen as climate-induced disasters. Consider the 197-km Kiratpur-Manali Highway in Himachal Pradesh. Heavy rains in July 2023 damaged its 16 km stretch, delaying work and adding costs. By August 2023, Rs 14,000 crore had been spent, with flood losses exceeding Rs 500 crore. Parts of this project have been financed by the government-owned India Infrastructure Finance Company Limited, and a consortium of banks led by the Indian Bank.
The situation is even worse when it comes to the hydropower sector bankrolled by Indian FIs running on public money. The NTPC-run Tapovan Vishnugad project in Uttarakhand with a cost overrun of 266 per cent (from Rs 2,978.5 crore to Rs 7,928.8 crore), the NHPC-run Parbati II in Himachal Pradesh with a cost overrun of 218 per cent, and Teesta stage 3 in Sikkim with a cost overrun from Rs 5,705 crore to Rs 14,000 crore are glaring examples wherein price escalation is majorly attributed to climate emergency-induced disasters.
Such instances have served to underline the unreliability of government-certified environmental clearances in assessing geological and climate risks. In fact, examples such as calamities involving dams over the Teesta River in Sikkim, have shown that many independent and community voices, which forewarned about such disasters, were far more accurate.
It needs to be pointed out that the notion of ‘climate-induced risks’ elides the fact that climate emergency is a consequence of thoughtless industrial, infrastructural and financial activities and ignores that a fair risk framework needs to take into account the climate, environmental and social harm caused by big credit.
Himalayan Infra Push: A Test Case for RBI’s Climate Risks
As the government plans a mega infrastructure push in the Himalayas proposing big dams (more than 100 by some accounts), solar parks, roads, highways and power transmission lines, will the FIs financing them show sensitivity to risks posed by climate emergency?
The Reserve Bank of India (RBI) released the ‘Draft Disclosure Framework on Climate-Related Financial Risks’ in February last year, emphasising that FIs should publicly disclose how they are tackling investment risks linked to climate change. This framework recommended that FIs establish climate risk management systems at the board level, develop appropriate strategies and procedures, and begin reporting these measures to the public starting in 2025.
Further, the RBI has, time and again, recommended both ‘top-down’ (beginning with macro-economic indicators) and ‘bottom-up’ (beginning with detailed microdata) approaches of ‘scenario analysis’ and ‘stress testing’ to estimate the climate-induced financial risk posed to investment portfolios. These are tools to assess the financial stability of banks and investments in case of possible situations made worse by climate risks.
Much will depend on whether these risk management mechanisms and ‘scenario analysis’ methodologies incorporate participatory approaches involving local communities, civil society, and independent researchers.
Public reporting of measures undertaken towards financial management of ongoing projects experiencing cost escalations owing to climate emergency-induced extreme events will help risk management for running ventures. Public reporting of loan cancellations and restructurings undertaken by banks in the Himalayan region in response to climate risks can actually foster a climate of accountability and encourage sustainable infrastructure planning.
Or will it be Business as Usual?
The more likely scenario, however, is that no major change will take place. Building big infra in the Himalayas has always been a testing enterprise, teeming with risks arising from geology, environment and socio-economic and cultural claims of the local communities. This has not stopped successive governments from building big.
Let us consider the instance of the hydropower sector in the Himalayas, whose promotion, the government claims, is crucial to enhance the share of ‘renewable’ power in India’s energy mix. Over the years, this key sector has witnessed an exodus of private project proponents owing to its high costs and risks.
In numerous such instances, the government or public sector enterprises have stepped in and pumped taxpayers’ money or government involvement has served as a guarantee for public sector FIs to keep supporting the project till it starts generating some revenue.
When private equity investors in Teesta stage 3 complained about natural calamity-induced cost overruns to the tune of Rs 615 crore in 2014, the Sikkim government promptly stepped in to buy the private-owned shares, allegedly at inflated prices, to save the day both for the private investors as well as for the banks which had provided debt for the project. What happens if the government cushions climate-related financial risk through guarantees and budgetary expenditure?
The Impasse of Climate-Linked Financial Risk
This brings us to the blinkered vision which underpins the notion of climate-related financial risk which is being fostered by the central bank. It attempts to reduce climate-related events to financial profit and loss.
Till the government is going to rescue risk-ridden infrastructure, ‘climate-related financial risk’ will not pose any actual risk.
Additionally, public sector banks have been known to sign write-offs (Rs 14.56 trillion from 2014 to 2023, with a measly Rs 2.04 trillion worth of recoveries) and sustain huge haircuts (as high as 96 per cent) in loss-making projects. They are yet to win the confidence of the public that they will exercise prudence while investing their savings.
Policymakers will be all too ready to justify building power infrastructure in the name of the need to promote ‘renewable’ energy, rather than tread the hard path of policymaking that attempts to harmonise protecting the environment, climate and the socio-economic needs of people.
Big infrastructures in the Himalayas have emerged as guzzlers of public money. Such expenditure would perhaps have been justified for a purpose that served the public interest. But does big infrastructure in the Himalayas serve such a purpose? For many Himalayan communities, the answer increasingly is no, but perhaps there is still a distance to be covered before one arrives at a majority consensus.
On World Environment Day, the challenge confronting India’s massive financial sector is whether it will be able to incorporate climate-induced financial risks in a meaningful way. Or will the RBI’s recommendations result in the formation of another layer of governance, which will rubber-stamp its approval on lending decisions?
This article was originally published in The Outlook and can be read here.
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