Carbon Risk to Increase Borrowing Cost in Future

India’s Largest Private Sector Bank HDFC announced earlier this year its commitment to Greener Future by planning to become carbon neutral by 2031-32. Bank has announced its strategy to finance green products like EV’s and making investment decision based on the ESG Score. Various large Indian corporates like ACC, Infosys, Mahindra, etc have committed to reduce the emissions and achieve Carbon neutrality in times to come. This will be reflected in the operations. of the companies, making the commitment to go carbon neutral or reducing the carbon footprints substantially. 

What about the Companies, which are not fast enough in adopting the lower carbon trajectory? Can there be chances that the lender starts pricing carbon risk in their investment decision. Will the cost of borrowing of such company will go up. Can the firms, having high carbon footprints be subjected to penalties if stricter climate policies, such as carbon taxes are implemented.  It is becoming evident that the fossil fuel companies may be devalued over time as much of the discovered hydrocarbon reserves may never be extracted and may remain underground for ever. This may result in impairments of assets. What about those firms, which are delaying their transition towards lower Carbon Footprints? Will there be a penalty for high emission, will they have access to easy availability of funds at competitive rates.

According to S&P Global, by 2050, at least one asset of 66% of major global corporations, has high physical risk, under the high impact climate change scenario. Carbon pricing costs for major companies will be up to $ 283 billion, representing 13% of the revenue by 2025. This cost may be levied by the Government on high emitters in the form of Carbon Tax or some other levy. Globally Government, Regulators and Central Bankers are unanimously reaching a broader consensus, for pushing the Corporations towards adopting a carbon light behaviour.

According to a research paper of Bank for International Settlement (BIS), since 2016, Global Banks have started pricing the carbon risk in the syndicated lending, post the Paris Agreement. Research also highlights that the cost of borrowing has gone up by 3 to 4 basis points and touching up to 7 basis points in case of high emitters.

ESG investing is getting mainstream as it enables the investors to make investment decision based on the climate. Lenders will soon be putting greater focus on the climate related risk, while assessing the credit risk of the portfolio. ESG disclosure will help the lender in effectively pricing the risk. In India, credit is available to firms with good credit behaviour. The cost of borrowing is dependent on numerous factors including assessment and pricing of the risk based on the outcome of assessment. 

As per the United Nations, India has suffered, approx. USD 80 billion in economic losses in 19 years (2000-2019) due to climate-change disasters. Task Force on Climate related Financial Disclosures (TCFD) recognises that climate is the biggest risk for Global economy and financial disclosure standards should be of high quality, that effectively communicates the risk. G-7 Countries have agreed and are in the process of implementing uniform Global Standards that communicates according the needs of Investors for making climate risk embedded, informed decision making. In India SEBI has also come out with BRSR, for meeting the Investor’s needs.

Indian Market will not remain isolated from the Global Financial Community. Someday Indian markets will catch up and act in tandem with the Globally emerging lending practices, where climate risk will be embedded in the cost of borrowing and cost can go higher for the Companies which are taking longer time for reducing their Carbon Footprints.

Bureau Galactik Views

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