New Delhi: Banks with greater exposure to carbon-intensive sectors are likely to incur higher credit risk over time, leading to increased monitoring and recovery costs, IIM Lucknow researchers have found in their study.
A team of researchers from the institution conducted a study providing insights into how banks’ lending patterns toward carbon-intensive sectors shape their long-term financial health and operational efficiency.
Published in the Journal of International Financial Markets, Institutions and Money, the research flagged that sustainability and financial performance are interconnected, and it is essential to align financial strategies with the global transition to a low-carbon economy.
While banks do not emit carbon directly, they indirectly play a role by financing high-carbon industries such as fossil fuels and heavy manufacturing.
“Financial institutions are exposed to transition risks that are not immediately visible in traditional risk assessment. This research underlines the importance of factoring in sectoral exposure from a long-term perspective, especially in the context of evolving climate policies,” co-author Vikas Srivastava, ONGC Chair Professor, IIM Lucknow, told PTI.
“By assessing a panel of 158 banks across 26 countries, the research team found that banks with greater exposure to carbon-intensive sectors tend to become less efficient over time. This is mainly because these industries face increasing regulatory scrutiny and policy shifts in a low-carbon transition, making them riskier borrowers.
“This results in banks incurring higher credit risk, leading to increased monitoring and recovery costs when loans turn non-performing,” Srivastava added.
Sowmya Subramaniam, Associate Professor, IIM Lucknow, explained that a key feature of the study is its introduction of a measure of carbon-sector exposure, which combines loan concentration with a measure of carbon emissions.
“This approach enables a more precise assessment of the risks embedded in banks’ lending portfolios. The research highlights the importance of strong capital buffers. More capitalised banks can absorb the risks of carbon-intensive lending, limiting the efficiency impacts caused by climate change,” said Subramaniam, who also co-authored the report.
The researchers have recommended that banks rethink their lending portfolios while taking long-term risks into account.
“The study shares actionable insights for regulators to prepare effective climate-risk and capital policies. It reinforces the idea that transitioning toward greener portfolios is good for both the environment and business.
“Along with demonstrating the inter-bank and intra-bank structural similarities, the study identifies key insights into how banks’ lending patterns toward carbon-intensive sectors shape their long-term financial health,” Subramaniam said.
