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India's largest banks have begun to audit their own and borrowers' carbon footprint as they try to mitigate financial risks amid growing pressure from regulators and investors to better align their ESG reporting with global norms, a dozen sources told Reuters.

The South Asian nation is the world's third-highest greenhouse gas polluter and has set a goal of reaching net zero emissions by 2070.

India's financial sector lags other major economies in its reporting on Scope 3 emissions, or lending-related emissions - the biggest contributor to the financial sector's carbon footprint.

About 25%-35% of Indian bank loans are directly exposed to carbon-intensive sectors, including coal mining and diesel intensive transportation, according to rating agency Moody's.

A lack of climate-risk disclosures could dent a bank's appeal for global investors and a delayed transition to greener business models may raise borrowing costs for companies, analysts said.

"There is a significant demand from international investors and asset managers for more disclosures surrounding sustainability and around the path towards low-carbon economies," Alka Anbarasu, associate managing director at Moody's Investors Service, said.

"Definitely, there is pressure from investors and financiers and that may translate into higher funding costs for banks."

KICK-STARTING THE TRANSITION

The Reserve Bank of India (RBI) and the lenders' association have been nudging local banks to recognise climate-related financial risks on their books.

Indian banks including Union Bank of India, IndusInd Bank, Indian Bank and Bank of India have decided to measure their financed emissions while ICICI Bank, Axis Bank and Federal Bank, have already mapped such exposures, sources at these banks said.

The country's largest lender, State Bank of India, invited proposals from consultants in August to measure its loan book's carbon footprint.

None of the sources wished to be identified because they were not authorised to speak to the media.

Indian banks' loans to carbon-heavy sectors like petroleum, coal and nuclear fuels stood at 1.20 trillion rupees ($14.42 billion) in late August whereas lending to infrastructure-related sectors was at 12.40 trillion rupees.

Once the audit is completed, banks may look to increase the share of lending to sectors like renewable energy and electric vehicles, said an official at a large public sector bank.

The RBI is yet to issue formal guidelines on green financing, but said in May it will set a disclosure framework.

The RBI and the Indian Banks' Association did not respond to a Reuters' email for comment.

GLOBAL INVESTOR PUSH

For private banks, the push has also come via global investors demanding increased climate-risk disclosures from banks, five of the bankers said.

"We expect banks to assess and report on their Scope 3 emissions and to set a Paris aligned net zero target," said Olivia Lankester, director of responsible investing & sustainability at Federated Hermes, a U.S.-based investment management firm with exposure to Indian assets.

Moody's Anbarasu said investors' demand meant "greater amount of funding will be available for greener projects or for banks that are pursuing the path towards sustainability."