Indian banks are yet to wake up to the needs of environmental, social, and governance (ESG) norms due to their lack of vision and clarity on how they apply to lenders, reveals a survey conducted by an industry body on behalf of the central bank.

A Reuters report said the Reserve Bank of India (RBI), after realising the need is likely to use the findings to adopt the first set of guidelines to propel green finance.

The central bank has earlier acknowledged climate change as a source of financial risk. The RBI is likely to issue guidelines regarding the matter later this year.

According to the survey, a majority of domestic banks, particularly mid-sized and small ones, are unable to understand the ESG functionalities.

 Their lack of clarity stems from a lack of understanding over matters involving lenders. "There is also a low incentive to switch to these norms," a source was quoted as saying by the wire agency.

Worldwide, banks are restructuring a growing number of loans to link them to a borrower's ESG performance. 

Research by London-based Acuity Knowledge Partners suggests ESG-based lending rose to $322 billion globally in 2021, from $6 billion in 2016, accounting for over 12 per cent of total lending.

RBI's governor, Shaktikanta Das, said earlier this month that the central bank will "soon" issue guidelines for regulated entities to increase green lending, accept green deposits, and mitigate risks related to climate change. 

He said green loans can be ESG-linked, and they are issued solely to finance environmentally sustainable projects. These guidelines, the RBI's first step in implementing ESG norms, will help India meet its target of reducing its carbon emissions to net-zero by 2070.

As a prelude, the RBI released a discussion paper last July that, besides acknowledging the risk of climate change, emphasised the need for a strategy to address the risk.

Right now, some large private and public sector banks are already lending to projects related to renewable energy, electric vehicles, and battery storage. Axis Bank Ltd and HDFC Bank Ltd are establishing an ESG culture, with the latter also constituting a board-governed environmental policy in 2019.

At present, for most lenders, monitoring ESG parameters would be a key challenge.  "Banks currently do not know how to monitor parameters regarding the ESG framework and how to quantify them. There is no technology in place," a bank official said.

The RBI's push is facing hurdles as bankers are finding it difficult to train staff to align with ESG goals, while most banks had not yet assessed if they need to hire further to implement these norms.