Introduction
One of the most significant regulatory developments in India's financial sector is the Reserve Bank of India's ("RBI") 'Draft Disclosure framework on Climate-related Financial Risks, 2024',1 announced on February 28, 2024. This framework emanates from the fact that climate-related risks are becoming increasingly material and have potential implications for financial stability. The framework admits that a lack of adequate information about climate-related financial risks can lead to asset mispricing and capital misallocation, thus requiring a standardised disclosure approach.
Regulatory Scope and Coverage
The framework encompasses a list of Regulated Entities ("REs"): Scheduled Commercial Banks (except Local Area Banks, Payments Banks and Regional Rural Banks), Tier-IV Primary Urban Co-operative Banks, All-India Financial Institutions comprising EXIM Bank, NABARD, NaBFID, NHB and SIDBI and Top and Upper Layer Non-Banking Financial Companies. Foreign banks have been mandated specifically to report separately the disclosures related to their operations in India.
Four-Pillar Framework Structure
The framework consists of four thematic pillars. Within the Governance pillar, REs are required to report on their oversight structures relating to climate issues, which would include board responsibilities, management roles, and integration of climate considerations in the decision-making process of an organisation. Strategy: The pillar requests the RE to describe the strategy in terms of climate-related risks and opportunities across relevant time horizons, including their evaluation as they pertain to business models and financial planning. Risk Management: Demonstrates how these aspects are integrated into the overall framework of risk management through risk processes that identify, assess, and monitor climate-related financial risks. The Metrics and Targets pillar requires defined metrics and targets on managing climate risk, including disclosures on emissions and progress to be reported in detail.
Tiered Implementation Timeline
RBI has adopted the pragmatic approach to implementation under a carefully structured timeline, where larger institutions such as SCBs, AIFIs, and Top/Upper layer NBFCs would be required to start with Governance, Strategy, and Risk Management disclosures from FY 2025-26 while Metrics and Targets is to follow in FY 2027-28. The Tier IV UCBs have been given an extended timeline of FY 2026-27 and FY 2028-29, respectively. These timelines take into consideration the different levels of preparedness and resources among the categories of financial institutions. Therefore, this tiered structure suggests that RBI is also well aware of the disparity in preparedness and availability of resources in different financial institutions.
Baseline and Enhanced Disclosure Requirements
The framework allows for an elaborate two-tier disclosure process. The baseline disclosures entail very basic details such as the governance structures, fundamental risk assessment procedures, and crucial climate-related metrics. More comprehensive disclosures will include more detailed reporting, such as scenario analysis, emissions data, and detailed performance metrics. This structured approach allows REs to develop their climate risk assessment capabilities progressively while ensuring meaningful disclosure from the outset. The enhanced disclosures focus especially on quantitative metrics, such as detailed emissions reporting and specific climate-related targets.
Internal Control and Validation Mechanisms
The framework lays emphasis on strong internal controls, and disclosures are subject to proper internal assessment and board-level review. The demands make the climate-related disclosures reliable and accurate. REs have to incorporate these disclosures within the financial results/statements and publicly disclose on their sites. This integration within existing financial reporting frameworks underscores the significance RBI attaches to climate-related risk management.
Comprehensive Emissions Reporting Framework
This includes detailed requirements related to emission reporting, consisting of defined and methodologies to report on Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (other indirect emissions). The REs mandatorily disclose absolute gross emissions as well as financed emissions, with emphasis on industry-wise segregation and methodological elaboration on the same. All this would be an epitome of RBI's commitment toward doing in-depth climate risk assessment and management.
Climate Scenario Analysis Requirements
The most distinctive feature of the framework is the concentration on climate scenario analysis. REs are mandated to conduct and report comprehensive analyses of scenarios encompassing several climate-related outcomes, alongside potential effects on the operations and strategy of the institution, including both physical and transition risks, and in doing so, paying special attention to time horizons and the assumptions underlying the analysis.
Conclusion
RBI's climate disclosure framework is a step forward in the management of climate risk within India's financial sector. It is comprehensive in coverage, phased in terms of implementation, and has tiered disclosure requirements which will help financial institutions develop and improve their climate risk management capabilities. The detailed requirements regarding emissions reporting, scenario analysis, and internal controls demonstrate RBI's commitment to ensuring meaningful and reliable climate-related disclosures. Once these requirements are initiated by financial institutions, the framework will be pivotal in promoting better understanding and management of climate-related financial risks in the Indian financial system.
Footnotes
1 Draft Disclosure framework on Climate-related Financial Risks, 2024, Reserve Bank of India, available at: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4393.
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