G20 push for banks

Transparent disclorures can shape a low-carbon future.

India’s G20 presidency presented a significant opportunity to advance sustainability finance, as highlighted by various commentators, including DH (India should use G20 presidency to address the ‘green’ question, April 30). The G20 Sustainable Finance Study Group (SFSG) has addressed challenges in green finance and sought to boost the financial system’s capacity to attract private capital for sustainability. While banking disclosure standards at the national and global levels are crucial for financial oversight, the focus on the content of these disclosures often overlooks a crucial question: who should receive these disclosures? In particular, they neglect a vital stakeholder group: household depositors. This oversight is noteworthy, as it is widely accepted that clear and transparent disclosures empower regulators to enforce compliance more effectively while enabling consumers to make informed choices. Public scrutiny forms the basis for independent data analytics and public participation in informed development debates.

Household depositors at commercial banks wield significant influence over funds. Greater financial inclusion fuels India’s household savings, with bank deposits coming from over 77% of the population. By Q1 2023, savings had reached $2.16 trillion, with households comprising two-thirds of all deposits. Projections anticipate $3.84 trillion by 2027. Loan-to-deposit ratios are close to 80%. According to RBI data, total loans surpassed $1.67 trillion and displayed a consistent upward trend. However, banking finance hasn’t matched its potential for a low-carbon economy. For power, households must gain it through public scrutiny, enabling democratic control of their funds.

Commercial banks provide diverse services spanning corporate, personal, and project finance, insurance, investments, advisory services, and more. Therefore, such banks are an important intermediary for most green finance instruments. Their performance must be captured in a “report card” for household depositors. India’s Reserve Bank sets climate lending quotas, but depositors can foster competition with more metrics. The G20 SFSG and regulators like the ISSB and SEBI provide disclosure models. Report cards ensure accountability, drive analytics, and empower informed depositors to exercise consumer choice over banking services based on relevant portfolio metrics. Following are the essential metrics distilled from the above frameworks that should be mandatory disclosures:

Pathways: Net-zero carbon guidance, similar to earnings guidance, enhances investor understanding of precise mitigation strategies.

Risks: Materiality screens climate-related financial risks for investor reporting.

Performance: Sustainable growth policies require performance measures encompassing ESG aspects that are adaptable across industries.

Co-benefits: GHG mitigation offers co-benefits like development, economic growth, job creation, and poverty reduction. Disclosing these through a bottom-up approach helps identify multiple advantages.

Life-Cycle Management (LCM) provides qualitative variables alongside quantitative environmental impact comparisons in a comprehensive value chain. Marginal Abatement Cost

Curve: Essential for GHG regulations, it plots the cost and potential for emissions reduction at various levels: firm, sector, or economy-wide, showing the price per tonne of CO2 mitigation against cumulative mitigation quantity.

A green report card requires widespread support. Central banks, traditionally focused on macroeconomic stability, now recognise their role in assessing climate-related financial risks. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) supports this expanded mandate. However, financial crusaders within banking systems are a minority and need support from ordinary citizens
and depositors. NGFS should push for monthly report cards from commercial banks to
depositors.

To expedite public scrutiny, G20 discussions should incorporate disclosure resolutions into the global banking accord, Basel III. Among the world’s 60 largest banks, most from G20 developed nations increased fossil fuel financing post-Paris Agreement, with China’s leading as the top two. Only 27 reduced funding, including India’s SBI. Private equity and hedge funds, while currently avoiding disclosures, are unwittingly inviting scrutiny from activist investors
and legal watchdogs. Commercial banking disclosure legislation could extend to cooperative banks, offering numerous advantages.

The G20 Sustainable Finance Working Group Deliverables, a 2023 report, makes over three dozen policy recommendations, many relevant to disclosures. Yet the report does not explicitly recognise household depositors as disclosure stakeholders. 

The IPCC’s Sixth Assessment Report emphasises the integration of social sciences in addressing climate change, particularly in policymaking. Mandatory bank disclosures can amplify the Global South’s voice in climate finance negotiations. Empowering household depositors for a just transition to a low-carbon economy through global public scrutiny enables informed choices and reduces climate risk. The G20 must lead in depositor empowerment through disclosure for a democratic push towards a low-carbon future.

(The writer is a former faculty at leading B-schools in India, Singapore, and the US)