Climate-Sensitive Sectors

Climate-sensitive sectors are those segments of the economy whose performance, productivity, and financial viability are significantly influenced by climate conditions and climate-related policy changes. In banking and finance, exposure to such sectors is a critical determinant of climate-related financial risk. For the Indian economy, climate-sensitive sectors occupy a central position due to the country’s geographic diversity, dependence on natural resources, and development-oriented growth model. Understanding these sectors is essential for assessing financial stability, credit risk, and long-term economic resilience.

Concept and Importance of Climate-Sensitive Sectors

Climate-sensitive sectors are characterised by high vulnerability to physical climate risks such as extreme weather events and gradual environmental changes, as well as transition risks arising from policy and technological shifts towards a low-carbon economy. These sectors often rely heavily on natural capital, stable climate patterns, or carbon-intensive processes.
From a financial perspective, banks and financial institutions with concentrated exposure to climate-sensitive sectors face elevated risks of asset impairment, increased defaults, and valuation volatility. Identifying and monitoring these sectors is therefore a core component of climate-risk assessment, stress testing, and scenario analysis.

Agriculture and Allied Activities

Agriculture is one of the most climate-sensitive sectors in the Indian economy. It remains heavily dependent on monsoon rainfall, temperature patterns, and water availability. Variability in rainfall, increased frequency of droughts and floods, and rising temperatures directly affect crop yields, farm incomes, and rural employment.
For the banking system, exposure to agriculture translates into heightened credit risk, particularly for priority sector lending, cooperative banks, and regional rural banks. Climate shocks can lead to widespread loan distress, increased demand for loan restructuring, and pressure on public finances through relief measures. Allied activities such as fisheries, forestry, and livestock farming are similarly vulnerable to climate variability.

Energy and Power Sector

The energy sector is climate-sensitive primarily due to transition risks. India’s energy system is undergoing a structural shift from fossil fuels towards renewable energy sources in line with national climate commitments and global decarbonisation trends. Thermal power generation, coal mining, and related industries face risks of asset stranding, declining profitability, and regulatory tightening.
At the same time, renewable energy projects are exposed to physical risks such as extreme weather events affecting generation capacity and infrastructure. Banks and financial institutions financing the energy sector must therefore balance transition opportunities with evolving risk profiles.

Infrastructure and Construction

Infrastructure development is a key driver of India’s economic growth but is highly exposed to climate risks. Roads, ports, airports, power grids, and urban infrastructure are vulnerable to floods, cyclones, heat stress, and sea-level rise. Climate-related damage can lead to project delays, cost overruns, and revenue losses.
For banks and long-term financiers, infrastructure exposure involves significant credit and operational risks due to long asset lifecycles and high capital intensity. Climate sensitivity in this sector has implications for project appraisal, insurance coverage, and public–private partnership models.

Real Estate and Urban Development

The real estate sector is increasingly recognised as climate-sensitive due to its exposure to physical risks and regulatory transitions. Coastal and flood-prone urban areas face risks of property damage, declining asset values, and higher insurance costs. Rising temperatures also increase energy demand for cooling, affecting operating costs and affordability.
From a financial perspective, climate risks in real estate can affect mortgage portfolios, commercial property lending, and collateral valuations. Urban climate stress has broader implications for municipal finance and housing affordability.

Manufacturing and Heavy Industry

Manufacturing sectors such as steel, cement, chemicals, and automobiles are sensitive to both physical and transition risks. Disruptions to supply chains caused by extreme weather events can affect production and revenues. Transition risks arise from stricter environmental regulations, carbon pricing, and changing consumer preferences.
Indian banks with exposure to energy-intensive manufacturing face risks of declining competitiveness and increased compliance costs for borrowers. Over time, these factors may influence creditworthiness and investment flows.

Financial Sector Exposure and Risk Transmission

Climate-sensitive sectors are interconnected with the financial system through credit, investment, and insurance channels. Adverse climate impacts on these sectors can lead to higher non-performing assets, reduced profitability, and capital strain for banks. Given India’s bank-dominated financial system, such sectoral stress can have systemic implications.
Non-banking financial companies and insurance firms are also exposed, particularly through infrastructure financing and catastrophe-related claims. These interlinkages underscore the importance of sectoral analysis in climate-risk management.

Relevance for the Indian Economy

The prominence of climate-sensitive sectors in India reflects structural features such as reliance on agriculture, rapid urbanisation, and infrastructure-led growth. Climate impacts on these sectors can affect employment, inflation, fiscal balances, and external trade.
India’s climate commitments under the Paris Agreement further imply a gradual reallocation of capital away from high-emission activities towards sustainable alternatives. This transition will reshape the risk-return profiles of climate-sensitive sectors over time.

Role of Banking Regulation and Policy

The Reserve Bank of India has increasingly acknowledged the importance of sectoral climate exposure in assessing financial stability. Regulatory initiatives encouraging climate-risk assessments, disclosures, and sustainable finance aim to improve the banking system’s preparedness for climate-related shocks.
Sector-specific insights also support targeted policy interventions, such as climate-resilient agriculture finance, green infrastructure funding, and transition finance for carbon-intensive industries.