India's Financial Sector and Climate Change Preparedness
India faces a significant funding gap of $10 trillion to meet its net-zero target, emphasizing the importance of domestic finance. The mutual fund (MF) sector is crucial in this aspect. However, challenges such as potential GDP reduction by 24.7% due to climate disasters by 2070 present both opportunities and challenges for asset managers. An analysis reveals the current state of climate preparedness among Indian asset management companies (AMCs).
Current State of Climate Readiness in AMCs
- Most AMCs are in the early stages of recognizing climate risks, scoring under 50% on climate preparedness.
- Emission reporting is primarily compliant with regulatory mandates, with only two AMCs disclosing verified Scope 1 and 2 emissions.
- Scope 3 Category 15 emissions, representing most of an AMC's carbon footprint, remain undisclosed.
- Sustainability-themed investments are minimal, making up only 0.22% of total assets managed in FY24.
- Despite offering ESG mutual funds, many AMCs still invest in high-emission sectors.
Challenges and Inconsistencies
The approach towards climate preparedness is largely reactive, adhering to SEBI's mandatory ESG guidelines without actively integrating climate considerations. This results in exposure to increased financial risk and highlights a fundamental negligence.
Opportunities for Improvement
- Internal Policies: Adopt robust screening criteria to exclude coal and fossil fuel-reliant companies across all asset classes.
- Sustainable Investments: Enhance allocation to sustainable and ESG mutual funds (currently 0.22% of AUM) to align with net-zero goals.
- Capacity Building: Establish sustainability committees with board-level oversight to embed climate risk management.
- Regulatory Reforms: Develop AMC-specific disclosure standards and a centralized database for improved transparency.
Conclusion
To mitigate financial risks and contribute to a low-carbon economy, Indian AMCs must upgrade their climate risk management practices. This involves stronger regulations and proactive initiatives, ensuring the protection of investor portfolios and promoting sustainable economic growth.