ESG lessons from Joshimath

January 23, 2023

Corporates and financial institutions need to curtail their exposure to such risks

Joshimath, a small but popular town located on major pilgrimage and trekking trails in Uttrakhand, has been in news of late for the wrong reason — it is sinking, rock by rock.

Geologically, the sinking is attributed to a phenomenon called ‘land subsidence’¹ , which is caused when large amounts of groundwater have been withdrawn from certain types of rocks, such as fine-grained sediments. The rock compacts (loses its porosity) because the water is partly responsible for holding the ground up. When the water is withdrawn, the rock falls in on itself.

The first case of subsidence in Joshimath in recent years came to light in October 2021 when cracks developed in 14-15 houses. That number had increased to 150 by December 2022 and zoomed to 849 in the third week of January 2023².

The number of houses in the unsafe zone (inhabitable) had increased to 167 by the third week of January from 86 as on January 10, 2023³. A few such unsafe hotels were razed to the ground by authorities, allegedly without appropriate compensation for loss of livelihood. Further, 250 families have been evacuated to safer locations.

The event has added grist to the raging discussion around raising environmental, social and governance (ESG) standards.

How is this an ESG risk?

The Joshimath case has been buzzing for decades now — it was first noted by the Mishra Commission in 1976 and experts have been talking about likely land subsidence since then — especially given the area’s vulnerability to flash floods, landslides and tectonic activity.

However, heavy development work, involving the use of explosives and extensive drilling, construction activities, and large hydroelectric projects have continued unabated.

Thus, companies operating in this area, as well as financial institutions that have exposure to projects here, are sitting atop a ticking time bomb.

Protests to shut down a large hydel project — previously banned by an expert body — are already gaining traction⁴ and will intensify as more families suffer evacuation and loss of livelihood. The town administration has also temporarily ordered halting the construction work of some projects.

Globally, there are many such instances of hydro power projects being delayed or abandoned due to such risks.

In 2022, Germany’s state-owned investment and development bank, KfW, decided to pull out of financing a 15.75 MW hydropower project in Bosnia and Herzegovina amid community protests and lobbying by non-government organisations.

A similar outcome was witnessed in Indonesia as well. In both of these cases, the viability of the projects and, by association, the investment was at risk due to environmental and social impact.

How can these risks be mitigated?

By their very nature, large hydroelectric projects have a significant negative impact on the environment and local communities. This is exacerbated when the projects are situated in particularly risky geographies.

Therefore, stakeholders exposed to this sector and these locations need to rigorously inform themselves of the inherent risks and the repercussions — financial as well as reputational — and establish monitoring systems and processes so that they are proactive and staying ahead of the curve.

This process should be built on openness and transparency, rigorous due diligence, technical expertise, good faith consultation, and two-way engagement. Climate Bond Initiative’s criteria for hydropower projects can be referred to for a deeper understanding of best practices.

In general, potential physical climate and human-induced risks need to be considered more stringently. Banks and other financial institutions need to evaluate risks such as earthquake, flood, land subsidence, drought and water stress, gauge their exposure to these, and assess how immune their portfolio is to such events. The risks are not limited to hydro projects and are applicable to all sectors, including (but not limited to) textiles, pharmaceuticals, mining, agriculture, and transmission lines.

The Task Force on Climate-Related Financial Disclosures reporting framework is a good starting point for data gathering and reporting.

The RBI has also begun to address climate risk monitoring and disclosures, and released a discussion paper⁵ on the issue. This should spur financial institutions to start preparing for new regulations.

Indeed, the results of a recent survey⁶ conducted by the RBI on the preparedness of Indian banks on climate risks were far from positive. Only two of the 12 public sector banks (PSBs) and four out of 16 private sector banks surveyed had any internal strategy in this regard. Only one of the 12 PSBs had made an attempt to quantify the loan and investment portfolio vulnerable to climate risks, compared with five of six foreign banks and five of 16 private sector banks. Notably, as per RBI’s database, banks are exposed to over INR 856 crores of outstanding credit in the area⁷.

Prudence - the need of the hour

The existing and under-construction development work in India is just a fraction of what is being planned.

Thus, it would be prudent to focus on building projects that last for decades without harming the people and the communities living nearby.

Joshimath is just the tip of the iceberg. We needn’t experience an ice-shelf collapse to take matters more seriously.

Corporates and financial institutions need to curtail their exposure to such risks

Joshimath, a small but popular town located on major pilgrimage and trekking trails in Uttrakhand, has been in news of late for the wrong reason — it is sinking, rock by rock.

The first case of subsidence in Joshimath in recent years came to light in October 2021 when cracks developed in 14-15 houses. That number had increased to 150 by December 2022 and zoomed to 849 in the third week of January 2023².

The event has added grist to the raging discussion around raising environmental, social and governance (ESG) standards.

How is this an ESG risk?

The Joshimath case has been buzzing for decades now — it was first noted by the Mishra Commission in 1976 and experts have been talking about likely land subsidence since then — especially given the area’s vulnerability to flash floods, landslides and tectonic activity.

However, heavy development work, involving the use of explosives and extensive drilling, construction activities, and large hydroelectric projects have continued unabated.

Thus, companies operating in this area, as well as financial institutions that have exposure to projects here, are sitting atop a ticking time bomb.

Protests to shut down a large hydel project — previously banned by an expert body — are already gaining traction⁴ and will intensify as more families suffer evacuation and loss of livelihood. The town administration has also temporarily ordered halting the construction work of some projects.

Globally, there are many such instances of hydro power projects being delayed or abandoned due to such risks.

In 2022, Germany’s state-owned investment and development bank, KfW, decided to pull out of financing a 15.75 MW hydropower project in Bosnia and Herzegovina amid community protests and lobbying by non-government organisations.

A similar outcome was witnessed in Indonesia as well. In both of these cases, the viability of the projects and, by association, the investment was at risk due to environmental and social impact.

How can these risks be mitigated?

By their very nature, large hydroelectric projects have a significant negative impact on the environment and local communities. This is exacerbated when the projects are situated in particularly risky geographies.

Therefore, stakeholders exposed to this sector and these locations need to rigorously inform themselves of the inherent risks and the repercussions — financial as well as reputational — and establish monitoring systems and processes so that they are proactive and staying ahead of the curve.

This process should be built on openness and transparency, rigorous due diligence, technical expertise, good faith consultation, and two-way engagement. Climate Bond Initiative’s criteria for hydropower projects can be referred to for a deeper understanding of best practices.

The Task Force on Climate-Related Financial Disclosures reporting framework is a good starting point for data gathering and reporting.

The RBI has also begun to address climate risk monitoring and disclosures, and released a discussion paper⁵ on the issue. This should spur financial institutions to start preparing for new regulations.

Prudence - the need of the hour

The existing and under-construction development work in India is just a fraction of what is being planned.

Thus, it would be prudent to focus on building projects that last for decades without harming the people and the communities living nearby.

Joshimath is just the tip of the iceberg. We needn’t experience an ice-shelf collapse to take matters more seriously.

Corporates and financial institutions need to curtail their exposure to such risks

Joshimath, a small but popular town located on major pilgrimage and trekking trails in Uttrakhand, has been in news of late for the wrong reason — it is sinking, rock by rock.

The first case of subsidence in Joshimath in recent years came to light in October 2021 when cracks developed in 14-15 houses. That number had increased to 150 by December 2022 and zoomed to 849 in the third week of January 20232.

The event has added grist to the raging discussion around raising environmental, social and governance (ESG) standards.

How is this an ESG risk?

The Joshimath case has been buzzing for decades now — it was first noted by the Mishra Commission in 1976 and experts have been talking about likely land subsidence since then — especially given the area’s vulnerability to flash floods, landslides and tectonic activity.

However, heavy development work, involving the use of explosives and extensive drilling, construction activities, and large hydroelectric projects have continued unabated.

Thus, companies operating in this area, as well as financial institutions that have exposure to projects here, are sitting atop a ticking time bomb.

Protests to shut down a large hydel project — previously banned by an expert body — are already gaining traction4 and will intensify as more families suffer evacuation and loss of livelihood. The town administration has also temporarily ordered halting the construction work of some projects.

Globally, there are many such instances of hydro power projects being delayed or abandoned due to such risks.

In 2022, Germany’s state-owned investment and development bank, KfW, decided to pull out of financing a 15.75 MW hydropower project in Bosnia and Herzegovina amid community protests and lobbying by non-government organisations.

A similar outcome was witnessed in Indonesia as well. In both of these cases, the viability of the projects and, by association, the investment was at risk due to environmental and social impact.

How can these risks be mitigated?

By their very nature, large hydroelectric projects have a significant negative impact on the environment and local communities. This is exacerbated when the projects are situated in particularly risky geographies.

Therefore, stakeholders exposed to this sector and these locations need to rigorously inform themselves of the inherent risks and the repercussions — financial as well as reputational — and establish monitoring systems and processes so that they are proactive and staying ahead of the curve.

This process should be built on openness and transparency, rigorous due diligence, technical expertise, good faith consultation, and two-way engagement. Climate Bond Initiative’s criteria for hydropower projects can be referred to for a deeper understanding of best practices.

The Task Force on Climate-Related Financial Disclosures reporting framework is a good starting point for data gathering and reporting.

The RBI has also begun to address climate risk monitoring and disclosures, and released a discussion paper5 on the issue. This should spur financial institutions to start preparing for new regulations.

Prudence - the need of the hour

The existing and under-construction development work in India is just a fraction of what is being planned.

Thus, it would be prudent to focus on building projects that last for decades without harming the people and the communities living nearby.

Joshimath is just the tip of the iceberg. We needn’t experience an ice-shelf collapse to take matters more seriously.

The first case of subsidence in Joshimath in recent years came to light in October 2021 when cracks developed in 14-15 houses. That number had increased to 150 by December 2022 and zoomed to 849 in the third week of January 2023².

Protests to shut down a large hydel project — previously banned by an expert body — are already gaining traction⁴ and will intensify as more families suffer evacuation and loss of livelihood. The town administration has also temporarily ordered halting the construction work of some projects.

The RBI has also begun to address climate risk monitoring and disclosures, and released a discussion paper⁵ on the issue. This should spur financial institutions to start preparing for new regulations.